Don’t count out inflation just yet.
The Labor Department Wednesday reported that labor costs jumped 4.9 percent in the second quarter, well above the 4.2 percent initially reported, and a level at which central bankers may not be comfortable.
Wages, along with energy costs, are a key component of the manufacturing process, and businesses are having a difficult time passing on those costs to customers, instead seeing their profit margins erode. The concern on the part of the Federal Reserve is that those higher input costs are at some point going to necessitate higher prices, leading to more widespread inflation.
Meanwhile, the increase in wages comes at a time when the productivity of workers showed a dramatic decline. The government said productivity – the amount of output per hour of work – increased at an annual rate of 1.6 percent in the second quarter, which was better than the initial report of 1.1 percent but well below the pace of the first quarter, when productivity grew by 4.3 percent.
Within the manufacturing sector, productivity increased 2.6 percent, while the hourly compensation of all manufacturing workers rose by 4 percent, reflecting a 4.2 percent jump in the durable goods industries and a 3.4 percent increase in the nondurables sector.
Unit labor costs in manufacturing increased 1.3 percent, versus the first-quarter increase of 9.3 percent, which was the largest since the third quarter of 2000, when it increased 12 percent.