The U.S. Employment Cost Index rose a greater-than-expected 1% in the second quarter, but not enough to provoke the U.S. Federal Reserve to raise interest rates economists say.

The jump pushed the ECI’s year-on-year rate to 4%. “While not a big move, the uptick suggests that efforts by companies to restrain wage growth is running into some resistance,” notes BMO Nesbitt Burns. Most of the pressure is on the benefits side, wages remain under light pressure. “U.S. employment costs are stabilizing in the 4% zone due to sticky benefit costs. However, the underlying downward pressure on wages and salaries should be the dominant factor in the year ahead,” says BMO.

This result is expected to hamper second quarter productivity numbers, but CIBC World Markets says that a relatively strong four-quarter average should cancel-out any inflationary impact of higher wages over the past year.

“Although today’s ECI numbers were on the high side of the consensus, compensation pressures remain relatively muted,” says CIBC. “The absence of significant upward pressure in the ECI, an important indicator for the Fed, lends further support to the Fed standing pat on rates for the remainder of the year. However, with overall inflation remaining low, the healthy growth in real wages is supportive for consumer spending.”

BMO says that the latest initial jobless claims also hint that the labour market is gradually firming in the U.S. “However, there is still enough slack in the labour market to prompt further downward pressure on employment costs in the year ahead, helping firms repair profit margins.”

News release
http://www.bls.gov/news.release/eci.nr0.htm