Most traders know the monthly jobs report and the average hourly earnings figure that comes with it. Fewer pay attention to the employment cost index, which only arrives once a quarter. Yet many economists, and policymakers at the Federal Reserve, regard it as the cleaner measure of what is happening to the cost of labour in the US. When wages are the main worry for inflation, that makes it worth understanding.
What the employment cost index measures
The employment cost index, usually shortened to ECI, is published by the US Bureau of Labor Statistics. It tracks the change in what employers pay for workers, covering both wages and salaries and benefits such as health insurance and pension contributions. It is released quarterly, around the end of the month after each quarter closes.
The key feature is that it holds the mix of jobs constant. It follows the cost of the same types of roles over time, so it is not distorted when lots of low-paid or high-paid workers join or leave the workforce. Average hourly earnings, by contrast, can rise simply because cheaper jobs disappear, even if nobody gets a pay rise.
Why the Fed cares about it
Services make up most of the US economy, and labour is the biggest cost for most service businesses. If employers are paying a lot more each year for the same staff, they tend to pass that on through higher prices. A central bank trying to bring inflation back to 2 per cent wants to see labour costs growing at a pace consistent with that goal, after allowing for productivity.
Because the ECI strips out the job-mix noise, it is seen as a more reliable read on underlying wage pressure. A run of strong quarterly readings tells the Fed that inflation in services may be sticky. Softer readings suggest the labour market is cooling in a way that should help inflation ease.
How markets react
The figure is usually expressed as a quarterly percentage change, alongside a yearly rate. Traders compare the quarterly number with forecasts. A hotter-than-expected reading tends to push US Treasury yields higher, particularly shorter-dated ones that are most sensitive to Fed expectations, and can support the dollar. Growth shares, which are more sensitive to interest rates, may come under pressure. A softer figure can have the opposite effect.
The ECI often lands on the same morning as other data, so its influence depends on the context. When the Fed is debating whether it needs to tighten further, as it is when members are dissenting in favour of a hike, a wage reading can matter more than usual.
A simple example
Imagine forecasts expect labour costs to rise 0.9 per cent in the quarter and the figure comes in at 1.2 per cent. That suggests wage pressure is building faster than expected. Bond traders might sell two-year Treasuries, pushing yields up, and the dollar could firm against the euro and the pound. If the figure instead came in at 0.7 per cent, the market might add to bets on easier policy later.
Common mistakes
A common mistake is treating one quarter as a trend. Like most data, the ECI can be noisy, and a single strong reading can be revised or reversed. Another is ignoring benefits costs, which can swing for reasons that have little to do with how tight the jobs market is. A third is trading the headline without checking what the market had already priced in.
The bottom line
The employment cost index is the quarterly wage gauge that adjusts for changes in the mix of jobs, which is why the Fed takes it seriously. A hot reading can lift yields and the dollar, a soft one can do the reverse, and the context of the Fed debate decides how much it matters. For more on reading the data that moves rates, see our guide to the US GDP advance estimate. If you want to test how you would handle a data-heavy session, the free Samuel & Co Trading Trader Assessment is a sensible next step.
