Source: Economics Group of Wells Fargo Bank, N.A.
Summary
The second quarter Employment Cost Index offers the latest sign that the downward trend in inflation is back on track after a derailment at the start of the year. The ECI came in touch softer than expected, advancing 0.9% over the quarter, or at a 3.7% annualized rate. The second quarter’s moderation leaves it closely approaching a pace consistent with the Fed’s inflation goal once accounting for productivity. With the ECI the Fed’s preferred barometer of labor costs growth, today’s data mark an important step toward the FOMC gaining “greater confidence” that inflation is cooling sufficiently to begin reducing the fed funds rate.
Back on Track
Second quarter data on employment costs showed further signs that the Fed’s efforts to reduce inflation pressures are bearing fruit. The Employment Cost Index rose 0.9% over the second quarter, which was a touch softer than consensus expectations. While still noticeably above last cycle’s peak of 2.9%, employment cost growth slowed to 4.1% year-over-year in Q2, the smallest gain in two and a half years. Moreover, having increased at an annualized rate of 3.7% in the three months ending in June (chart), the second quarter’s figures show employment cost growth closely approaching a pace consistent with the FOMC’s 2% inflation objective once accounting for productivity growth (productivity gains allow businesses to raise compensation faster than prices).
The second quarter’s moderation in employment cost growth jibes with other signs of labor costs slowing. Average hourly earnings growth slowed to 3.9% year-over-year in the second quarter, while the newer and more forward-looking measure of posted wages from Indeed slipped to 3.1% to move back in line with its pre-pandemic average (chart).