Labor Cost Increases Should Be Low
The government is expected to report today that labor costs rose at one of the slowest rates on record in the final quarter of 1995, and the trend is likely to continue this year as companies fight to control wage increases, analysts said.
While that’s not great news for wage earners, it suggests the Federal Reserve is likely to push U.S. interest rates even lower as inflation remains mostly absent from the economy.
“Firms are very bottom-line conscious at the moment, and that’s keeping wage demands under control,” said Richard Koss, an economist with Maria Fiorini Ramirez Inc. in New York. “It’s getting a little tough to justify any inflation fears.”
Investor expectations that inflation will remain in check helped send U.S. bonds soaring today. The benchmark 30-year Treasury bond rose 25/32, pushing down its yield almost 6 basis points to 6.04 percent in late New York trading.
Stocks also sprinted higher as the Dow Jones Industrial Average broke through the 5600 mark for the first time. It surged 58.53 points to close at 5600.15. The dollar, meanwhile, was mixed against other major foreign currencies.
Fed policymakers and Wall Street economists closely follow labor costs, which make up about two-thirds of total product costs, as a gauge of inflation. The Labor Department report today will document the fourth-quarter employment cost index, the most complete picture of how much businesses are paying in wages, salaries and benefits.
The consensus of analysts surveyed by Bloomberg Business News is that the index advanced 0.7 percent in last year’s fourth quarter and about 2.7 percent for all of 1995. That would be up slightly from a 0.6 percent increase in the third quarter — which tied for the smallest rise since the series began in 1981.
“Workers are not part of any current or impending inflation problem,” said Tom Carpenter, chief economist with ASB Capital Management in Washington, which holds $6 billion in bonds.
Diminished inflation expectations and a slowing economy prompted the Fed to cut its target for a key overnight bank lending rate in quarter point moves in July, December and January. Many analysts expect another cut when the Fed’s policy-setting panel next meets on March 26.