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Fed Inflation Hawks See Price Pressures

Economy: Increases are expected in a broad index of U.S. labor costs. Some fear the first-quarter report could rekindle inflation.

April 20, 1998|From Bloomberg News

WASHINGTON — Inflation hawks at the Federal Reserve Board may see the early signs of price pressures in a report later this month that is expected to show that U.S. labor costs increased in the first quarter.

The employment cost index--the broadest gauge of U.S. wages and benefits--probably rose at a 3.6% annual rate in the first quarter, according to a survey by Bloomberg News. The statistics are due to be released April 30.

That would exceed last year's 3.3% increase, the biggest rise in four years, and keep pressure on employers to raise prices to offset higher labor costs. While workers welcome a raise, Fed officials, who watch this report closely, may not be so receptive. That's because labor costs are an important piece of the inflation picture, accounting for about two-thirds of total consumer prices.

"The Fed will be watching the ECI very, very carefully," said Nick Perna, chief economist at Fleet Financial Group in Hartford, Conn. "Everything we see both anecdotally and factually shows we're in the midst of a pickup in labor costs."

Fed Chairman Alan Greenspan has said there's nothing wrong with U.S. workers being paid more, as long as they're becoming more productive at the same time. Over the last year or two, the U.S. has witnessed a "notable pickup" in productivity, Greenspan said recently.

In fact, even as wages rose in the last several months, overall inflation has been dormant and the Fed has left the overnight bank lending rate unchanged for more than a year. Consumer prices not including food and energy rose in March at the slowest pace in over three decades.

The longer that wage costs keep going up, however, the greater the danger that inflation could reignite, Fed Gov. Laurence Meyer suggested earlier this month. Recent gains in productivity may prove "transitory," he said, and that means rising wages threaten the "exceptional" U.S. economy.

"The very tight labor markets can be expected to put upward pressure on wage change and hence inflation," he said.

While Meyer didn't refer directly to the employment cost index, it'll be key to his outlook on inflation because it's regarded as the best advance signal of wage and benefit pressures. If companies boost wages to attract the workers they need, they're more likely to raise prices to maintain profits. They've largely refrained from doing that so far, but further increases in wages will make it more difficult to hold the line.

Fed Gov. Roger Ferguson said he'll be watching the ECI for signs wages are rising at a faster pace than they did in the fourth quarter. "If we don't see acceleration over that number, then obviously we can be a little more comfortable, more relaxed," Ferguson said.

Among the components of the first-quarter ECI report, wages and salaries are expected to have risen at an annual rate of 3.9%, the biggest gain in nearly seven years, according to Standard & Poor's MMS. In addition, MMS economists expect that the benefits component rose at a "modest" 2.1% annual rate.

There already have been signs that health-care costs picked up last quarter. For example, the medical cost component of the consumer price index rose 0.3% in March, following gains of 0.3% in February and 0.1% in January.

If benefit and wage costs do creep higher, and if productivity gains are a thing of the past as Meyer said, then the days of record lows on inflation may be over.

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