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Chart of the Week : U.S. Employment Cost Index

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance. This week, we focus on the U.S. Employment Cost Index which is scheduled to be released tomorrow at 13:30 GMT.


Click here to download this week's full edition of Macro Chartmania.

The U.S. Employment Cost Index is released on a quarterly basis by the U.S. Bureau of Labor Statistics. This is a survey of about 4,500 non-farm businesses and about 1,000 state and local governments tracking movement in the cost of labor – both wages and benefits. It goes back to Q1 1980. Most of the time, investors pay little attention to the release. This time is different. Powell’s FOMC press conference on Wednesday increased uncertainty about the pace of monetary policy tightening in the United States. The monetary market now anticipates five interest rate hikes this year (versus four prior). Several banks have bolder calls : BNP Paribas now forecasts sixth hikes in 2022. Others anticipate a bold move from the Fed in the March meeting, with a 50 basis points hike (Nomura, for instance).

We know from Powell’s December FOMC press conference that the strong rise in the Employment Cost Index in Q3 2021 (+4,59 % year-over-year) was a strong factor behind the Federal Reserve (Fed)’s hawkish pivot. The release of the Q4 print will provide the Fed with an indication of wage inflation persistence into 2022. This will be key for the market to better assess the timing and pace of the Fed policy normalization.

In the below chart, we have plotted the National Federation of Independent Business (NFIB) compensation plans and the Employment Cost Index. A net 49 % of small businesses plan to raise compensation in the next three months. This is close to the highest on record. We know that the compensation practices of small businesses tend to lead broader wage and salary growth. Expect the Employment Cost Index to continue moving upwards, likely well above 5 % into 2022. This will likely fuel hawkish expectations from the market, both regarding the pace of interest rate hike but the reduction of the balance sheet too.

The other point of attention will be the release of the U.S. December core CPE tomorrow. This is the Fed’s preferred inflation gauge. Expect monthly core CPE inflation to just round up to 0.5 %. This would then push the year-over-year reading to 4.8 %. This is uncomfortably high, of course. This might also add to hawkish expectations. 

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