US: ICE is good news for the FOMC, but more will be needed – Wells Fargo

The Employment Cost Index (ICE) published on Tuesday had an unusual impact on financial markets, with the dollar weakening after the figures. Well Fargo analysts point out that the figures are one more in the list of inflation readings on which the Federal Reserve breathes a little easier. They report that while the report further supports a return of inflation to the 2% target, labor cost growth remains too strong to be consistent with its long-term sustainability. They believe that a further slowdown will be necessary before the FOMC will feel comfortable declaring victory over inflation.

ICE slowed down for the third consecutive quarter

“The ICE report offers the FOMC one of its clearest insights into how a tight labor market translates into elevated wage pressures. Before the pandemic, employment cost growth was just under 3%, along with core CPI inflation slightly below 2% The 5.1% increase in the ICE in the last year and the 4.0% annualized increase in the fourth quarter suggest that labor costs continue to grow approximately one percentage point above what would be consistent with the FOMC’s 2% inflation target, assuming similar-to-trend productivity growth.

“But when it comes to inflation, easing labor cost growth should not be confused with benign labor cost growth. The labor market remains incredibly tight. Numerous big-name companies have announced layoffs in recent months, but initial jobless claims are still hovering around record lows and more and more independent businesses are reporting finding it harder to fill jobs than they were before COVID.So while the slowdown in labor costs is a welcome development since the Fed’s outlook and yet another sign that inflation is headed back towards 2%, it’s too early to say it will stay there for the long term.”