According to this morning’s productivity report unit labor costs jumped far more than expected at a 2.8% rate in the fourth quarter.  This is likely to add to the recent evidence that the Fed won’t enact QE3 any time soon.   With the core rate already at the high end of the their range and unit labor costs on the rise they’re likely to be in a wait and watch mode.  Via the BLS:

“Unit labor costs in nonfarm businesses increased 2.8 percent in the fourth quarter of 2011, as productivity grew at a slower rate (+0.9 percent) than hourly compensation (+3.7 percent). Unit labor costs rose 3.1 percent over the last four quarters. Annual average unit labor costs increased 2.0 percent from 2010 to 2011.”

And as you can see below, unit labor costs are very highly correlated to inflation.  This 2.8% rate is nothing to panic about, but it’s certainly enough to put the Fed on wait and see mode:


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Cowpoke

    Cullen, what’s this mean? Lower motgages?

    “Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

    Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.

    Fed …”

  • Conventional Wisdumb

    Cullen or anyone else,

    How does this number translate into corporate profit margins?

    Doesn’t this imply a squeeze on earnings is in the pipeline?


  • Cullen Roche

    Sounds like hocus pocus. Or the shell game might be better. Can you guess which one Ben’s beard is hiding under??? :-)

  • Cullen Roche

    Could be. Or just passing costs along. Primary driver of profits in this cycle is deficits so keep an eye on deficits and you’ll know the general strength of profits….