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What's more important to the Fed when it comes to measuring wage growth? The employment cost index or the average hourly earnings number that comes out in the monthly nonfarm payrolls report?
That's the big question. The former has been surging for months, but the latter continues to be flat.
Deutsche Bank economist Torsten Sløk writes in an email to clients (emphasis his):
I'm getting questions about the Fed implications of the employment report, and the challenge for us in markets - and for the FOMC - is to figure out how much weight to put on the ECI relative to Average Hourly Earnings, see chart below. I have spoken with clients who believe we will see a hike in June because of the ongoing uptrend in the ECI. And I have talked to clients who believe the Fed will not hike in 2015 because of the continued sideways move in AHE. I think a fair way to describe the chart below is to say that a year ago there were no signs of wage inflation. And now some of the wage measures are trending higher. Combined with the continued decline in the unemployment rate we continue to believe the Fed will hike in September.
The more confident the Fed is in wage growth, the more likely it'll begin raising rates sooner than later.
Torsten Slok/Deutsche Bank