The wages of United States employees are on the rise, according to a report released Thursday by the U.S. Department of Labor.
The report showed that the Employment Cost Index rose 1.1 percent, its largest jump since 1991, and significantly more than the 0.8 percent increase expected.
While increased wages might benefit American pocketbooks in the short-term, the long-term effects of rising wages could seriously hamper the economy and financial markets.
Economists and market watchers consider the cost index one of the more important economic indicators. If the cost index shows an increase in wages, it’s very likely inflation will also increase.
Federal Reserve Chairman Alan Greenspan closely watches the ECI and on Tuesday announced that the Fed is ready to act “forcefully” to keep inflation under wraps by raising interest rates.
If the Fed decides to raise rates, home and auto loans will be more expensive as well as credit card payments. Students will take a hit as higher interest rates magnify their college loans.
When the news was released Thursday morning, investors shuddered as the market fell sharply with the Dow Jones industrials losing 180.78 points, 1.65 percent, and the Nasdaq shedding 65.83 points, or 2.43 percent.
But despite the unkind reaction from stocks, some analysts, like Michael Gilson at PrimeVest Financial in New London, Minn., were optimistic about the ECI.
“It’s more than likely that we will see a multiple-day pullback in the market, but I’m not too worried. This pullback may be a good thing for now, especially in the eyes of the Fed. If this turns out to be a three or four day dip, Greenspan won’t do a thing (with interest rates),” Gilson said.
While all eyes were on the ECI report, Ben Senauer, a University professor of applied economics, said people should also focus on the Gross Domestic Product information released by the U.S. Department of Commerce.
The GDP measures the growth of the U.S. economy. Slow growth usually means less long-term inflation.
GDP numbers, which were also announced yesterday, indicated that the economy grew at 2.3 percent last quarter, much less than expected.
“This fall in economic growth is actually a good sign. This is exactly what the Fed wants to see happen.
“In order for our economy to be stable, economic growth should not exceed 3 percent,” Senauer said.
He also explained the relationship between the jump in the ECI and the record-low unemployment rate.
“When unemployment is so low, wages will have to go up because businesses must lure quality applicants any way they can,” Senauer said.
The Federal Open Market Committee, the Fed’s board of directors, will meet on Aug. 24 to discuss the current economic conditions and the possibility of raising interest rates.