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September 07, 2005
A Bad Price Signal
The U.S. government said unit labor costs, closely monitored by the Fed to gauge inflationary wage pressures, rose at an annualized 2.5 percent pace in the second quarter, above economists' expectations of a 1.4 percent increase and more than double the government's first estimate of a rise of 1.3 percent.
Says one commentator:
"Unit labor costs moving up is seen as fanning some of the Fed's concerns on inflation, but I doubt from the Fed's perspective that this changes their view very much," said Stephen Gallagher, U.S. chief economist at SG Corporate & Investment Banking in New York.
"The Fed's underlying intent is to raise rates, and the market needs to perhaps concede to that somewhat," Gallagher added.
"It's not good. It's a huge step back for the Fed. It's not the direction where the Fed wants to go. It's unsettling," said Robert Brusca, chief economist at Fact and Opinion Economics.
The Wall Street Journal has a nice explanation of why this particular statistic is important...
The numbers, which surprised Wall Street, validated the Federal Reserve's view that inflation risks have "ticked up" recently. Economists surveyed by Dow Jones Newswires and CNBC had called for a 2% increase in nonfarm productivity.
Strong productivity growth tends to keep inflation down by allowing employers to raise wages without passing on the higher cost to consumers. But U.S. productivity growth has slowed over the last two years, driving up labor costs in the process. Fed policy makers have said the inflation outlook "will be influenced importantly by the trend in unit labor costs.
... and a reminder that the statistics in question are still controversial:
Productivity gains also were more impressive in the non-financial corporate sector, which Fed Chairman Alan Greenspan has called a "more accurate" gauge of general productivity trends. The Labor Department said productivity in that sector rose 6.8% in the second quarter, up from a first-quarter rate of 2.7%.
From my perspective, things just keep getting more and more interesting. As in the curse "shall you live in interesting times," that is.
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