Race for workers shifts into sixth gear

Summary

In yet another sign the labor market continues to tighten rapidly, the Employment CostIndex rose a record 1.4% in Q1, vastly exceeding expectations. The pickup comes despite increasing availability of labor supply, signaling that cost pressures from the tight labor market will not be easily stomped out. The FOMC is likely to stay on an increasingly hawkish path as a result, given labor costs represent a more persistent threat to the inflation outlook.

Wake up call for the Fed

The battle for talent escalated in the first quarter, with the Employment Cost Index jumping 1.4%–themost in the series' 21-year history and above expectations for a 1.1% gain. The pickup comes despite the increasing availability of labor, signaling that inflationary pressures from the tight labor market will not be easily stomped out.

As a reminder, the ECI is the preferred measure of labor costs among Fed policymakers. Unlike the more timely average hourly earnings in the monthly nonfarm payroll report, the ECI controls for compositional shifts in the workforce, which have been unusually large over the past two years. It also includes benefits, which account for 31% of compensation, therefore giving a more complete picture of the costs employers are facing in today's competitive hiring environment. The surprisingly strong ECI print for Q3, released in October 2021, was the catalyst for the FOMC speeding up its tapering plans according to Chair Powell at the December FOMC meeting. The first quarter ECI print is likely to stir more unease among Fed officials and keep the FOMC on an increasingly hawkish path despite GDP growth contracting in the same quarter.

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