The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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September 07, 2005

A Bad Price Signal

From Reuters:

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.

That sentiment certainly bucks the market trend, and not everyone is convinced that this is as big a non-event as Mr. Gallagher suggests.  From USA Today:

"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.

September 7, 2005 in Data Releases , Inflation , Labor Markets | Permalink


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Yes, my insightful comment after hearing reports of Moskow's remarks today was similar. "Interesting."

Posted by: Mark Thoma | September 07, 2005 at 02:24 PM

September's an easy call (+.25), but what about Nov. & most importantly Dec.?? I don't know anyone who believes 3.5% is closer to neutrality than 5%. The only question is whether we can withstand the effects of 5% ff. I believe AG addressed this last spring, & that he's properly identified our greatest risk as unmitigated greed - by the Admimistration, market players & industry professionals. (I'm hoping) he will dedicate his remaining time to reinforce the independence of the Fed by setting a clear course for his successor to deleverage our debt & downsize our open derivatives.
I'm sure hoping this is the case because we're at a critical juncture & no one else seems remotely interested.

Posted by: bailey | September 07, 2005 at 03:49 PM

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