The US wage growth debate comes to a head on Thursday with the release of the Q1 employment cost index (ECI) report at 8:30 p.m. ET.
“The ECI often is considered the best overall measure of labour costs because it includes other forms of compensation besides hourly pay (such as commissions) as well as benefit costs (which account for more than 30% of the total),” Credit Suisse economists explained on Friday. “Also, the ECI is not distorted by shifts in the industry mix, unlike average hourly earnings.”
In an email blast with the subject line “Hold on to your chair,” Deutsche Bank’s Torsten Slok warns Thursday’s report could once again be a catalyst for volatility as it could have implications for monetary policy, in particular the timing of the Federal Reserve’s first interest rate hike.
“Because of year-over-year base effects we could see a solid uptrend in wages,” Slok wrote. “This kind of increase would have to make the Fed feel better about its inflation forecast, and recall that Chair Yellen has said that rising wage and price inflation is not a precondition for liftoff.”
A big jump in the ECI would increase conviction that the Fed may start hiking rates sooner than later, a shift that many consider to be bearish for the markets in the near-term.
The consensus is expecting a 0.6% increase in the ECI in Q1 from Q4. On a year-over-year basis, that represents a 2.6% year-over-year jump.
But there’s not too much confidence in these forecasts.
“In advance of the release, the BLS earlier this week put out its annual revision of data going back five years, incorporating updated seasonal factors,” Slok added. “The revisions still show low figures for the 2014Q1 seasonally adjusted increments in compensation per hour and wages-and-salaries; indeed, the comp number remained at 0.3%, rounded, and the wage number revised only from 0.2% to 0.3%. Given the uncertainty about the underlying tendency at this juncture in a rather erratic series, there’s plenty of room for surprises on Thursday morning.“
Like Slok says, “Hold on to your chair.”