Sharp downgrades to US unit labor prices bode nicely for inflation outlook

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. unit labor prices grew far lower than initially thought within the third quarter, pointing to a nonetheless favorable inflation outlook regardless that worth will increase haven’t moderated a lot in current months.

The report from the Labor Division on Tuesday additionally confirmed labor prices really declined within the second quarter as a substitute of rising as had been estimated final month. Reasonable labor prices progress is more likely to be welcomed by Federal Reserve officers after they maintain their final assembly of yr subsequent week.

The U.S. central financial institution is predicted to chop rates of interest by 25 foundation factors, the third discount in borrowing prices because it began its financial coverage easing cycle in September.

“The labor market and wage progress are receding as a supply of inflationary pressures,” stated Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

“The Fed has grow to be much less targeted on the labor market as a supply of inflationary pressures however doubtless nonetheless welcomes additional indicators of slowing wage progress, notably since progress on different elements of inflation has been even.”

Unit labor prices – the worth of labor per single unit of output – elevated at a 0.8% annualized price final quarter, the Labor Division’s Bureau of Labor Statistics stated.

Economists polled by Reuters had anticipated labor prices progress could be revised right down to a 1.5% price from the beforehand reported 1.9% tempo within the July-September quarter.

That adopted a downwardly revised 1.1% tempo of decline within the second quarter. Labor prices had been beforehand reported to have superior at a 2.4% price within the April-June quarter.

They elevated at a 2.2% tempo within the third quarter from a yr in the past, revised down from the beforehand reported 3.4% price. The revisions mirrored up to date compensation information from the Bureau of Financial Evaluation.

U.S. shares had been blended. The greenback superior towards a basket of currencies. U.S. Treasury yields rose.

PRODUCTIVITY UNREVISED

A resilient financial system, lack of progress reducing inflation to the Fed’s 2% goal and considerations over President-elect Donald Trump’s proposed insurance policies, together with increased tariffs and mass deportations, have made the speed outlook subsequent yr unclear. The Fed’s coverage price is now within the 4.50%-4.75% vary.

It was hiked by 5.25 proportion factors between March 2022 and July 2023. Knowledge on Wednesday is more likely to present the patron worth index rising 0.3% in November after rising 0.2% for 4 straight months, a Reuters survey confirmed.

That may elevate the year-on-year improve in client costs to 2.7% in November from 2.6% in October. Excluding the unstable meals and power elements, the CPI was forecast to rise 0.3% for the fourth consecutive month, which might maintain the annual improve within the so-called core CPI at 3.3%.

Compensation rose at a 3.1% price final quarter, revised down from the beforehand reported 4.2% tempo. It integrated information from the BLS Quarterly Census of Employment and Wages (QCEW) for the second quarter. The BLS famous that ordinary updates to QCEW information “can result in revisions and essentially the most notable revisions on this launch occurred within the manufacturing sectors.”

Nonfarm productiveness, which measures hourly output per employee, elevated at an unrevised 2.2% tempo. Employee productiveness grew at an unrevised 2.1% price. It rose at an unrevised 2.0% price from a yr in the past.

Productiveness has expanded at a 1.8% tempo in the course of the present enterprise cycle, which began within the fourth quarter of 2019. That compares to a 1.5% price of progress over the past enterprise cycle, which ran from the fourth quarter of 2007 by the fourth quarter of 2019.

Some economists stated the pretty robust tempo of productiveness by a lot of 2023 and most of this yr raised questions how restrictive financial coverage was in the meanwhile.

“With productiveness information like these in hand, the hawks on the Fed can argue that rates of interest are nearer to impartial than the committee beforehand believed,” stated Christopher Rupkey, chief economist at FWDBONDS.

“The stronger productiveness development in all probability doesn’t cease the Fed from reducing charges once more subsequent week, however the variety of price cuts wanted in 2025 stays an open query.”