Labor Costs Rise at Fastest Pace in 5 Years

U.S. labor costs rose at their fastest pace in five years during the fourth quarter, according to government figures released Tuesday, a sign that inflation could start creeping higher.

The employment cost index--the broadest measure of wage, salary and benefit costs for businesses and government agencies--rose a larger-than-expected 1% after rising an unrevised 0.8% in the third quarter. Analysts had expected a 0.9% increase in the fourth quarter.

“This is what happens when you have a strong economy and a tight labor market,” said Raymond Worseck, chief economist at A.G. Edwards & Sons in St. Louis. “And there’s no question that medical costs are going to have a stronger increase in 1998 than in 1997.”

Even so, higher wages don’t necessarily mean that an acceleration of consumer price increases will follow. “The bottom line will be pressure on companies to either raise productivity or experience a squeeze on their profit margins” because competition will stop them from raising prices, said Lynn Reaser, an economist at NationsBank Corp. in Jacksonville, Fla.

What’s more, new figures from the Conference Board suggest that the fallout from Asia’s economic crisis could hamper growth in the months ahead. The Conference Board’s consumer confidence index slipped to 127.3 in January from a 28-year high of 136.2 in December as the turmoil in Asia sent financial markets swooning.

“Given a global slowdown, we expect inflation to slip this year, but profit margins may come under pressure,” said Bruce Steinberg, chief economist at Merrill Lynch & Co. in New York. Tuesday, retailer J.C. Penney Co. said it will close 75 poorly performing stores and dismiss 4,900 workers.

For all of 1997, employment costs rose 3.3%. That’s higher than the 2.9% increase in 1996 and the largest yearly hike since the 3.5% of 1993. Employment costs account for about two-thirds of consumer prices.

The Federal Open Market Committee--the Federal Reserve Board panel that sets interest rate policy--holds its first meeting of the year on Tuesday and Wednesday.

While the labor cost figures may provoke an inflation scare, “the general backdrop looks quite favorable,” said Ed Hyman, chief economist at International Strategy & Investment in New York.

In the fourth quarter, wage and salary costs rose 1.1%, the most since the 1.2% increase in the second quarter of 1990. Benefit costs rose 0.9%, the largest since the 0.9% increase in the third quarter of 1994.

The employment cost index is considered the most accurate measure of wages, salaries and benefits. It measures compensation per hour, including wages, salaries and the cost of benefits, from health insurance to Social Security contributions.

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Consumer Confidence

From a monthly survey of 5,000 U.S. households. Index; 1985=100.

Jan.: 127.3

Source: Conference Board