US: Employment costs record the highest increase in the last 20 years in 2021


The employment cost index (ECI), a broad wage and benefits indicator, rose 1% in 4Q21. Compared to the previous year, ECI recorded the highest increase of 4% in the last two decades. Employment costs point to rapid rise, reflecting businesses competing for a limited supply of workers. For a tight labor market, we see businesses being forced to raise wages more in the face of inflation to attract or retain workers. Many companies contribute to inflation by transferring these increased labor costs to consumers through price increases.

Unlike the monthly wage increases in the non-farm payrolls report to be announced next week; Employment costs are announced at a lower frequency (quarterly). Again, unlike hourly wages (AHE) data, ECI is not distorted by employment shifts between occupations or industries. In AHE, on the other hand, we can often see wage fluctuations due to job rotations. It’s like wages artificially rising while the workforce dwindled in the pandemic because low-paid workers were left out of the pool. Now, wage increases, aimed at balancing purchasing power against inflation, are self-feeding as businesses raise their prices even more. In other words, inflation brings high wage hike, and high wage hike brings inflation again.

If we look at the PCE data; Personal spending, adjusted for inflation, fell 1% last month, while the core PCE, the inflation gauge tracked by the Fed, rose 4.9% year-on-year, the biggest advance since 1983. A number of factors, including transport bottlenecks, capacity constraints, and stimulus-driven demand for goods drove inflation to its highest level in nearly 40 years. The hawkish tantrum Powell puts forth shows that the central bank may become even more aggressive in the face of inflation. If we look at the Fed’s point of view; Rate hike is coming in March. However, there is a serious uncertainty; Will we go beyond 5 rate hikes during the year (base scenario goes up to 5 rate hikes by the way), and 50 base points hike in March? Under these conditions, the Fed cannot step back from the tightening path. Interest rates will increase because it is not sure how dangerous inflation is, and because of the fear of an inflation spiral caused by policy plus wages. Therefore, we should not wait for the tightening cycle to break.

Kaynak: Tera Yatırım
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