The wage-inflation spiral alarm has yet to be sounded: US Q2 labor costs exceeded expectations, and actual purchasing power was eroded by inflation

The Zhitong Finance App learned that data released by the US Department of Labor on Friday showed that the increase in US labor costs in the second quarter of this year slightly exceeded expectations, and wage growth in the private sector accelerated. However, after adjustment for inflation, actual wage costs did not rise but fell, indicating that the job market did not provide a clear impetus for inflation.

The Employment Cost Index (ECI), which is regarded as the broadest measure of labor costs, rose 0.9% month-on-month in the second quarter, the same as the increase in the first quarter, but higher than the 0.8% expected by economists. In the 12 months to June, the index rose 3.4% year over year. Since ECI excludes the impact of changes in employment composition and job quality, policymakers have always viewed it as a reliable indicator for measuring the degree of idle labor markets and predicting core inflation trends.

Looking at the breakdown, wages and salaries, which account for the majority of labor costs, rose 0.9% month-on-month in the second quarter and 3.2% year-on-year. Among them, the month-on-month increase in wages and salaries in the private sector accelerated from 0.7% in the first quarter to 0.9%, becoming the main driver of the moderate rise in labor costs. However, price increases over the same period eroded nominal growth — according to Department of Labor data, wage costs have declined over the past year after adjusting for inflation. Furthermore, the cost of health benefits provided by private sector employers soared 6% year over year, almost double the rate of wage growth, further increasing the pressure on companies' employment expenses.

Recruitment in the job market accelerated for a while between March and May of this year, but this trend clearly subsided in June. Economists describe the current labor market as a stalemate with “low employment and low layoffs.”

The Federal Reserve kept the benchmark overnight interest rate unchanged in the 3.50% to 3.75% range on Wednesday, but there are clear internal differences — three decision makers disagree and prefer to raise interest rates by 25 basis points. Federal Reserve Chairman Kevin Walsh said after the meeting: “Employment growth has kept pace with the labor force growth rate, and the unemployment rate has hardly changed.” Data released the day before showed that inflation cooled down in June, but it was still far above the Federal Reserve's target level of 2%. Taken together, the ECI report further confirms that the current labor market is not sufficient to trigger the risk of a spiral rise in wage-inflation.

Looking ahead to next week, the US Bureau of Labor Statistics will release the July Non-Farm Payroll Report to provide an updated basis for observing recruitment and salary trends across the US. Economists expect the number of non-farm workers to increase by nearly 90,000 in the same month, up from June, while the unemployment rate is expected to remain stable.