WASHINGTON, July 29 (Reuters) – U.S. labor costs rose strongly in the second quarter as a tight labor market boosted wage growth, which is likely to keep inflation high and provide assurances that the Federal Reserve will continue to raise interest rates sharply.
Other data on Friday showed consumer spending accelerated in June, but the rise was tied to higher costs for gasoline and a range of other goods and services, with the biggest monthly price increase since 2005. Soaring inflation pushed the economy’s 1.3 percent contraction in the first half of the year, putting it on the brink of recession.
“The Fed will continue to work hard to control inflation without tipping the economy into recession,” said Dante DeAntonio, an economist at Moody’s Analytics in West Chester, Pa. “Wage and price growth data won’t do them any good because Even with the general economic weakness, upward pressure clearly remains.”
The Labor Department said the employment cost index, the broadest measure of labor costs, rose 1.3% last quarter after accelerating 1.4% between January and March. Economists polled by Reuters had expected the ECI to rise 1.2 percent.
Labor costs soared 5.1% year over year, the largest increase since the series began in 2001, and rose 4.5% in the first quarter. However, inflation eroded earnings. Inflation-adjusted labor costs fell 3.6% year over year.
Policymakers and economists generally see the ECI as one of the better measures of labor market weakness and a predictor of core inflation because it adjusts for changes in the composition and quality of jobs. Data on Thursday showed the economy contracted again in the second quarter, leading economists and investors to believe the Federal Reserve will slow the pace of interest rate hikes in September.
The U.S. central bank raised its policy rate by another three-quarters of a percentage point on Wednesday. The rate has been raised by 225 basis points since March.read more
Strong wage growth has pushed up employment costs. Wages and salaries surged 1.4% after rising 1.2% in the first quarter. They were up 5.3% year over year, also the biggest gain since the current series began in 2001.
The private sector was the main driver of growth, where wages and salaries rose 1.6%, up from 1.3% in the January-March period.
Wage hikes have occurred across all industries, with traditionally low-wage leisure and hospitality and retail seeing big gains. Private sector wages rose 5.7% year-on-year, also the largest increase in the series.
Stocks on Wall Street were higher after Apple’s upbeat forecast slipped against a basket of currencies. U.S. Treasury prices were mixed.
tug of war
There were 11.3 million job openings at the end of May, with nearly two job openings for every unemployed person.
Annual growth in average hourly earnings slowed in the first half of the year, raising expectations for peak wage growth. Benefits rose 1.2% in the second quarter and 4.8% year over year.
“The second-quarter employment cost data provided no evidence that wage growth was slowing, putting the Fed on track to raise the funds rate by another 75 basis points at its September meeting,” said Nancy Vanden, chief U.S. economist at Oxford. Nancy Vanden Houten said. Economics of New York.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 1.1% last month after rising 0.3% in May, the Commerce Department said in a separate report on Friday. Economists had forecast consumer spending to rise 0.9%.
The data was included in an advance report on second-quarter gross domestic product released on Thursday. The economy contracted at an annualized rate of 0.9% last quarter after contracting at a 1.6% pace in the first quarter.read more
Consumer spending swelled last month on higher prices for gasoline and other energy products. Consumers are also spending more on health care and cars.
Higher costs pushed the personal consumption expenditures (PCE) price index up 1.0% last month. This was the largest increase since September 2005, after rising 0.6% in May. The PCE price index rose 6.8% in the 12 months through June, the biggest gain since January 1982. The PCE price index rose 6.3% yoy in May.
Excluding the volatile food and energy components, the PCE price index rose 0.6% after rising 0.3% in May. The so-called core PCE price index rose 4.8% in June from a year earlier, following a 4.7% rise in May.
Fed officials closely track these measures to achieve the central bank’s 2 percent inflation target. However, there are signs that inflation may be peaking. A third report from the University of Michigan on Friday showed that consumer inflation expectations slipped in July.read more
A surge in prices in June caused inflation-adjusted consumer spending to rebound only 0.1% after falling 0.3% in May. That put consumer spending on a weak growth trajectory heading into the third quarter after rising at the slowest pace in two years in the April-June quarter.
“The bad guys, high inflation, rising borrowing costs and dismal confidence are slowly winning the tug of war for consumers’ wallets,” said Sal Guatieri, senior economist at BMO Capital in Toronto.
Reporting by Lucia Mutikani; Editing by Paul Simao
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