Economists say that today’s U.S. Employment Cost Index shows that the Federal Reserve Board does not have to worry about inflation as it considers future rate actions.

U.S. employment costs were slightly lower than expected in the second quarter, and are likely to continue moderating. The headline ECI came in up 0.9% from the prior quarter. This trimmed the year-over-year increase to 3.9%, the slowest pace since the end of 1999.

“Wage pressures have started to head lower as the labour market has softened substantially from last year’s drum-tight conditions. The unemployment rate has climbed to 4.5% from the 30-year low of 3.9% reached last fall. Even with today’s report of a big weekly slide in initial jobless claims, the number of people now receiving unemployment benefits is up more than 40% from a year ago,” observes BMO Nesbitt Burns. “Against this backdrop, [U.S. Federal Reserve Board chairman Alan] Greenspan’s recent prediction that ‘the rate of increase in compensation is likely to moderate’ looks good.”

CIBC World Markets cautions that, “It’s still too early to see the full impact of increased labour market slack on employment costs, but today’s ECI report does suggest that wage inflation has begun to taper off. With no immediate turnaround in sight for the U.S. economy, the ECI is likely to continue its downward trend for the remainder of the year. Longer term, as wage growth cools in response to increased labour market slack, soft labour costs will join flat energy prices in providing further downward momentum to CPI.”

BMO concludes that Greenspan can worry about the lack of growth, rather than the inflation, noting, “It is encouraging that wage and benefit costs are indeed moderating in the face of softening labour markets. This should help ensure that inflation eases in the second half of the year, leaving the Fed with a free hand to ease further, if need be.” CIBC says that tomorrow’s GDP report will clearly have a greater influence on the Fed’s rate strategy.