Ignore average hourly earnings, ECI shows true COVID hit

The Employment Cost Index rose 0.5% in Q3 and on a year-ago basis is up at the weakest pace since 2017, which should keep inflation subdued. Employers are focusing more on wages than benefits to keep a lid on costs.

Weak Labor Market to Keep Inflation Subdued

The average hourly earnings series from the monthly payroll report continues to be distorted by the compositional shift in the labor market, but the ECI shows compensation growth easing when the mix of jobs is held steady. The ECI rose 0.5% over the third quarter, leaving it up only 2.4% over the past year.

The easing trend in compensation costs suggest that inflation should not rise to a threatening pace anytime soon.

Wages Under Pressure

Wages rose 0.4% for a second straight quarter, roughly half the rate of the pre-COVID trend. Private wage growth improved a tick to 0.5%, suggesting that use of pay cuts or freezes has eased up a touch since the onset of the crisis. Yet public wages rose just 0.1%, in a sign of the strains on state and local government budgets.

While wages point to some clamping down on costs, benefit costs eased up only slightly in Q3 with the trend little changed.

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