ECI - Not As Benign As You Think

By: Michael Ashton | Fri, Apr 27, 2012
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The Employment Cost Index just printed +0.4%, below expectations of +0.5%.

The ECI consists of two parts: wages and benefits. The benefits component is very hard to seasonally adjust - for example, while companies tend to adjust benefits on a calendar year, they don't do it EVERY calendar year. So it is usually important to separate the two components.

And thus, we find that the rise in benefits was somewhat soft, but the increase in wages was +0.52%, the biggest rise since 2008 Q3 (see Chart, source BLS).

As I constantly remind people, wages follow inflation and do not lead inflation, so for me this uptick confirms the inflationary dynamic rather than starts me worrying. But those who worry about wages causing inflation will find reason to be concerned here, even though the overall ECI number looked benign.

(Wages do play a role in causing inflation to be more persistent, so this matters in that sense as well).



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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