WASHINGTON- US labor costs increased strongly in the second quarter as a tight jobs market boosted wage growth, which could keep inflation elevated and give the Federal Reserve cover to continue its aggressive interest rate hikes.
Other data on Friday showed consumer spending accelerating in June, though the uptick was tied to higher costs for gasoline as well as a range of other goods and services, with monthly prices surging by the most since 2005. Soaring inflation contributed to the economy’s 1.3 percent contraction in the first half of this year, leaving it on the brink of a recession.
“The Fed will continue to grapple with trying to tame inflation without tipping the economy into a recession,” said Dante DeAntonio, an economist at Moody’s Analytics in West Chester, Pennsylvania “The data on wage and price growth will not do them any favors as upward pressure clearly remains even as the overall economy has weakened.”
The Employment Cost Index, the broadest measure of labor costs, increased 1.3 percent last quarter after accelerating 1.4 percent in the January-March period, the Labor Department said. Economists polled by Reuters had forecast the ECI would rise 1.2 percent.
Labor costs surged 5.1 percent on a year-on-year basis, the largest rise since the current series started in 2001, after rising 4.5 percent in the first quarter. Inflation, however, eroded the gains. Inflation-adjusted labor costs fell 3.6 percent on a year-on-year basis.
The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation, as it adjusts for composition and job-quality changes. Data on Thursday showing the economy contracted again in the second quarter led economists and investors to believe that the Fed would slow its pace of rate hikes in September.
