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Home Publications Blogs Beat the Press How Do You Spell "Inflation Hawks on the Warpath?" ECI

How Do You Spell "Inflation Hawks on the Warpath?" ECI

Thursday, 31 July 2014 08:36

The release of new data from the Employment Cost Index (ECI) has the inflation hawks really excited. It showed that compensation rose by 0.7 percent in the months from March to June. This is a sharp uptick from the 0.3 percent rate in the months from December to March. This could be just what is needed to force the Fed to raise interest rates to slow the economy and keep people from getting jobs. That's pretty exciting stuff.

Before we start designating people to give up their jobs in the war against inflation, it's worth looking at the data a bit more closely. The 0.3 percent ECI growth reported for the winter months was actually unusually low. It had been rising at a 0.5 percent quarterly rate (2.0 percent annual rate) for the last four years. Fans of arithmetic can average together the 0.3 percent measure from the first quarter with the 0.7 percent measure from the second quarter and get (drum roll, please) ....... 0.5 percent. 

In other words, the 0.7 percent rise in the ECI kept exactly on the growth track we have been for the last four years. It is not evidence of an uptick in the rate of wage growth (which would be good news).

Employment Cost Index


                                                  Source: Bureau of Labor Statistics.



Since there are people who see the rise in the second quarter ECI as a serious inflation threat, a few more data points may be helpful. The rise in the ECI for state and local employees was unchanged at 0.5 percent in both the first and second quarters. On the private side, the wage index went from a rise of 0.2 percent in the first quarter to 0.8 percent in the second quarter. The benefits index rose 0.3 percent in the first quarter, compared with 1.1 percent in the second quarter.

This leaves us with two possible explanations. The first is that the rate of increase in wages and benefits in the private sector slowed sharply in the first quarter and then accelerated even more sharply in the second quarter. Alternatively, the ECI under-reported wage and benefit growth in the first quarter. This means that if the trend growth was unchanged, we would find the sharp uptick in wage and benefit growth reported in the second quarter data.

When we look at a finer cut of the data it certainly seems consistent with the second story. For example, the increase in compensation for management, business, and financial occupations was 0.0 percent in the first quarter. It was 1.2 percent in the 2nd quarter. The increase in compensation for health care and social assistance industries was -0.3 percent in the first quarter. It was 0.6 percent in the second quarter. Does anyone believe that the world really looks like this?


Comments (10)Add Comment
bad news?
written by fairleft, July 31, 2014 9:29
So 0.7% wage growth is considered bad news by the powers that be in a country where the bottom sixty percent have experienced essentially no wage growth over the last 40 years. The real bad news is the PTB.
We are the champions, my friends
written by Larry Signor, July 31, 2014 10:21
A Workers Resume

Laid off in 1974...that OPEC thing.
Laid off in 1981...that inflation thing and the Gipper.
Laid off in 1991...that S&L thing.
Laid off in 2001...Y2K, stock bubble, the war, whatever.
Laid off in 2008...that bubble thing.
Laid off in 2014??? inflation again? Oh, wait. No job, no problem...
written by Last Mover, July 31, 2014 10:42

Well that's nice. Employers realized they had to raise wages to attract the structually unemployed and the Fed goes and nixes it in the bud.
written by Peter K., July 31, 2014 12:08


"The Bundesbank has backed the push by Germany’s trade unions for inflation-busting wage settlements, in a remarkable shift in stance from a central bank famed for its tough approach to keeping prices in check.

Jens Ulbrich, the Bundesbank’s chief economist, told Spiegel, a German weekly, that recently agreed pay rises of more than 3 per cent were welcome, despite being above the European Central Bank’s inflation target of below but close to 2 per cent."
I've had it with bloggers that filter!
written by Dave, July 31, 2014 12:57
Delong has a little piece on Neel Kashkari. Neel was actually a good person caught up in this mess. I'm sure he's rich, rich, rich now. Does he deserve it? It doesn't matter.

The only thing I want to hear from Neel is that he didn't pluck the $700 billion dollar of TARP out of thin air. This was the value under the curve of housing investment over trend.

RIght Neel?
Why do I want Neel to admit this?
written by Dave, July 31, 2014 1:02
Because it shows foreknowledge.

They knew this bubble was trouble and they were watching it.

It just so happens that they picked the wrong metrics to watch.

The wealth-effect spending was about 4x worse they they knew.

written by Ryan, July 31, 2014 1:12
Doesn't anyone think to look at percentage change from a year ago? Folks, this is not rocket science. You betray your biases when you ignore the simplest, most basic tools of analysis.
written by bananaguard, August 01, 2014 11:45
A little attention to detail tells quite a bit. The rise in compensation was partly the result of wages, partly benefits. The gain in benefits was driven by catch-up contributions to pension funds. Assuming workers anticipate full pensions upon retirement, this doesn't represent an increase in compensation to them. It represents an increase in cost to employers, but only in the sense that they paid up in Q2 after delaying contributions.

The wage gain of 0.6% was the biggest since Q3 of 2008, but followed a below-average 0.3% gain in Q1. Again, this is belatedness, not acceleration.
Economist hiding like cowards behind government numbers
written by Inflationista, August 01, 2014 2:50

No one but private sector bureaucrats like economists hiding behind government numbers to protect their jobs believes inflation is 1% Nobody.

One more Who-could-have-seen-it-coming? crisis and this joke of a profession will be disgraced into the dustbin of history where it belongs. Finally.
It's only inflation if...
written by Lord Koos, August 02, 2014 11:30
wages go up. When food, energy, and housing costs go up, it's not measured as inflation. Sorry, little people.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.