The 5.1% increase in the ECI over the past year and 4.0% annualized increase in Q4 suggest that labor costs are still growing about a percentage point above what would be consistent with the FOMC's 2% inflation target given trend-like productivity growth.
But when it comes to inflation, easing labor cost growth should not be conflated with benign labor cost growth. The labor market remains incredibly tight.
Therefore, while the deceleration in labor costs is a welcome development from the Fed's perspective and further sign that inflation is headed back toward 2%, it is too soon to declare that it will stay there for the long-haul.
- Wells Fargo
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