As we await the July update of the Consumer Price Index (CPI), I thought it would be a good time to revisit the wage and salary report that jolted the Federal Reserve to take action last November. This is the relatively obscure U.S. Employment Cost Index (ECI). The latest ECI quarterly report, released July 29, came in at 1.3% q/q for 2Q22 — higher than the 1.0% expected and just below the 1.4% jump in 1Q22 that marked a 38-year high. Well, that is even higher than the 1.2% ECI reading in 3Q21, which spurred the Fed into action last fall. Let’s look further into it. Year over year, the ECI rose to a 32-year high of 5.1% in 2Q22, after posting a 31-year high of 4.5% in 1Q22. Large ECI gains have been led by big wage and salary increases due to the continued labor shortages.
So, does the poor 2Q22 ECI report foreshadow today’s CPI report? If it does, then there is still pressure on the Fed to tighten more aggressively. On the other hand, if headline and core CPI have peaked and begun the climb down, then the Fed can moderate its tightening. My view is that the Fed has a good track record of reigning inflation in; I expect a softer than consensus CPI number, which will be good for markets.