US labour costs in the second quarter recorded their smallest increase in 33 years amid tepid gains in the private sector, but it likely was a temporary setback against the backdrop of diminishing labour market slack.
The unexpectedly smaller rise reported by the country’s Labor Department will probably not dampen speculation that the Federal Reserve is set to raise interest rates later this year.
The US labour market is fast approaching full employment.
The Employment Cost Index, the broadest measure of labour costs, edged up 0.2%, the Labor Department said.
That was the smallest gain since the series started in the second quarter of 1982 and followed a 0.7% rise in the first quarter.
"This data has periodically proved to be very lumpy and the sharp deceleration is inconsistent with other measures of wage inflation that are trending higher, not falling off a cliff," said Eric Green, chief economist at TD Securities in New York.
Economists polled by Reuters had forecast the employment cost index, which is widely viewed by policymakers and economists as one of the better measures of labour market slack, rising 0.6% in the second quarter.
US stock futures rose slightly after the data, while prices for US Treasuries traded higher. The dollar fell against a basket of currencies.
The deceleration in labour costs likely does not suggest a material slowing in wage growth, as commissions inflated worker compensation at the start of the year.
Labour market slack has diminished significantly over the last few years, which is expected to start putting upward pressure on wages.
"This is precisely how the Fed will interpret this report, even if the numbers here are atrocious. The broader trends are still unquestionably favourable," Green said.
At 5.3%, the unemployment rate is close to the 5% to 5.2% range that most Fed officials consider consistent with full employment. The ECI is also considered a better predictor of core inflation.
Wages and salaries, which account for 70% of employment costs, rose 0.2% in the second quarter, also the smallest increase on record. They had increased 0.7% in the first quarter.
Private sector wages and salaries were up 0.2% after gaining 0.7% in the prior quarter. Overall private sector compensation failed to rise for the first time on record.
Compensation in the services sector nudged up 0.1% in the second quarter after rising 0.6% in the prior period. Compensation in the goods producing sector rose a solid 0.7% after increasing 0.5% in the first quarter.
In the 12 months through June, labour costs rose 2%, the smallest 12-month increase since last year and further below the 3% threshold that economists say is needed to bring inflation closer to the Fed's 2% medium-term target.
