Two US Cost Gauges Surpass Estimates, Stoking Inflation Concern

(Bloomberg) — Two key US inflation gauges posted larger-than-forecast increases on Friday, heightening concerns that prices will remain persistently high and prompt continued aggressive interest-rate increases from the Federal Reserve.

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The Labor Department’s employment cost index, a broad gauge of wages and benefits, increased 1.3% in the second quarter from the prior three months, compared with a 1.2% median estimate from economists. Separately, the Commerce Department’s personal consumption expenditures price index, which forms the basis for the Fed’s inflation target, rose on a monthly basis in June by 1%, the fastest since 2005.

Employers, with a near-record number of open positions, are trying to attract and retain workers with higher pay and other perks, while consumers are being squeezed across the board and particularly by food and fuel costs. Fed officials have implemented the steepest interest-rate hikes in decades and have signaled their top priority is to reduce high inflation, though speculation mounted in financial markets this week that a slowing economy will force the central bank to lower borrowing costs early next year.

Two-year Treasury yields climbed after the data and US stocks also gained on Friday. Federal funds futures markets showed traders increased bets on a 75 basis-point hike in September, though they continued to wager that a 50 basis-point hike was the most likely outcome.

Fed Chair Jerome Powell has often referenced the ECI as a key measure of labor market tightness. In a press conference Wednesday following the central bank’s decision to raise interest rates by another 75 basis points, he said the index is “a very important one because it adjusts for composition” of employment.

Unlike the earnings measures in the monthly jobs report — which is forecast to show next week that average hourly earnings moderated in July — the ECI is not distorted by employment shifts among occupations or industries. Compared with a year earlier, the labor costs measure rose 5.1%, a fresh record in data back to the early 2000s.

What Bloomberg Economics Says…

The surprisingly high employment cost index (ECI), the Fed’s preferred wage gauge, means the central bank’s struggle with inflation is far from over, and bets on a “Fed put” for the market are clearly premature. Contrary to the expectation of markets — and Bloomberg Economics — wage growth shows signs of re-accelerating. Today’s data point has increased the risk that the Fed will have to go for another “unusually large” rate hike when it meets next in September.

–Anna Wong, chief US economist

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Even though wages are rising fast, they’re still not keeping up with inflation, forcing many Americans to make tough financial choices. Recent commentary from companies like Walmart Inc. and Best Buy Co. show consumers are dedicating much of their budget to essentials, leaving little leftover for other purchases.

Inflation-adjusted spending barely rose in June after falling in the prior month, the Commerce Department data show. As higher prices take a bigger bite out of consumers’ budgets, savings are dwindling. The saving rate declined to 5.1%, the lowest since 2009, according to the report.

Another report Friday showed consumers’ long-term inflation expectations remained elevated in July, weighing on sentiment, according to data from the University of Michigan.

Wages Rising

Wages and salaries for civilian workers rose a record 5.3% from a year earlier. Benefits gained 4.8%. Excluding government, private wages increased 5.7% from a year earlier.

While the monthly employment report’s hourly earnings figures are showing smaller annual increases, the Atlanta Fed’s wage growth tracker climbed 6.7% in June from a year earlier — the most in data back to 1997. Powell also has said that the ECI hasn’t reflected the same slowdown in wage growth yet.

Friday’s report show that compensation gains last quarter were broad based, with sales, finance and retail trade among the biggest increases.

There are signs that the labor market is softening, however. Companies like Rivian Automotive Inc. and Spotify Technology SA have either let workers go or said they’ll slow hiring, citing economic uncertainty. Jobless claims have generally been rising, and as the Fed continues to hike rates, that’ll likely curb demand for labor.

For now, the job market is still “extremely tight,” per Powell’s assessment, and that could keep wage growth heated. The numbers of vacant positions has eased somewhat, but is still close to a record.

Many companies are still struggling to find qualified workers, but some are starting to make progress.

“We absolutely have seen labor headwinds in the first half, but as we noted in our comments, we are starting to see those ease in the latter part of the second quarter and even the results that we’re seeing in July so far,” Northrop Grumman Corp. CEO Kathy Warden said on an earnings call this week.

But the economy is losing momentum, highlighted by a report Thursday that showed a second-straight decline in gross domestic product. That will likely keep a lid on future wage gains.

(Updates with University of Michigan data)