Worst ECI Reading Since 1982 Gives Fed a Headache

The employment cost index has thrown a major spanner in the works today, following its lowest reading since 1982. While many view other metrics as holding more importance, in my view there are few more important right now than this.

Reuters ECI

*Historical ECI data back to 1982. Source – Reuters Eikon

If the Federal Reserve wants evidence that inflationary pressures remain and its 2% target will be achieved, there needs to be a sustainable rise in wages. This figure suggests wages are going to remain depressed, which could possibly reflect an effort by employers to suppress wages in an attempt to remain price competitive and offset the effects of the stronger U.S. dollar.

Reuters Dollar Index

*US Dollar Index. Source – Reuters Eikon

The data got some response in the markets, with the dollar collapsing against the other currencies. The euro rallied more than one cent against the greenback to trade back near to 1.11, while the pound also gained more than one cent to hit 1.5680. Gold was another winner from the weak ECI reading, having suffered considerably from the prospect of a Fed rate hike.

While this in no way takes a September rate hike off the table, it could well prove quite damaging to the case for it. In the absence of wage and price inflation expectations, even the most hawkish of central bankers may have to rethink their positions.

The Fed has a dual mandate and while the labour market looks very healthy, employers are clearly intent on overcoming the competitive disadvantage of the stronger dollar by suppressing wages.

This could give the Fed a massive headache between now and year-end.

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.