The employment cost index has thrown a major spanner in the works today, following its lowest reading since 1982. While many view other metrics as holding more importance, in my view there are few more important right now than this. If the Fed wants evidence that inflationary pressures remain and its 2% target will be achieved, there needs to be a sustainable rise in wages. This figure suggests wages are going to remain depressed, which could possibly reflect an effort by employers to suppress wages in an attempt to remain price competitive and offset the effects of the stronger dollar.
The data got some response in the markets, with the dollar collapsing against the other currencies. The euro rallied more than one cent against the greenback to trade back near to 1.11, while the pound also gained more than one cent to hit 1.5680. Gold was another winner from the weak ECI reading, having suffered considerably from the prospect of a Fed rate hike.
While this in no way takes a September rate hike off the table, it could well prove quite damaging to the case for it. In the absence of wage and price inflation expectations, even the most hawkish of central bankers may have to rethink their positions. The Fed has a dual mandate and while the labour market looks very healthy, employers are clearly intent on overcoming the competitive disadvantage of the stronger dollar by suppressing wages.
This could give the Fed a massive headache between now and year-end.
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