Recent Employment Cost Index Estimates
The Employment Cost Index (ECI) is one of the data releases we monitor to help shape our inflation outlook. The latest figures for the ECI continue to point to restrained wage growth. Over the past four quarters, total compensation for private workers is up 2.2 percent, while wages and benefits are up 1.7 percent and 3.4 percent, respectively. Even though total compensation for private workers has been slowly increasing following the end of the recession, much of that increase has been associated with rising benefits costs and not wage growth. In fact, wage growth has not returned to pre-recession levels. Since the recovery began nine quarters ago, the wage series has made minimal progress toward 2.0 percent growth and remains well off of its 1990 to 2007 average growth rate of 3.3 percent.
Restrained wage growth has implications for the inflation outlook. Wages are the primary input cost that business owners must account for when they set their prices, especially for services. This tight relationship between wages and prices is evident in the high correlation (0.89) between wage growth and the services component of the CPI. Total compensation is also highly correlated (0.88) with the services component of the CPI.
The correlation with the CPI service measure, while it does not prove wage increases cause inflation, is certainly noteworthy. Given that services account for a large share of the consumer market basket (60 percent), it seems appropriate to make the connection between subdued wage growth and low inflation.
Previously, we noted that subdued labor costs will act as a drag on future inflation. The recent ECI reading suggests that labor costs are still subdued.