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Labor costs subdued
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April 29, 1999: 12:08 p.m. ET
Data suggest little inflation pressure, trigger rally in U.S. Treasury market
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NEW YORK (CNNfn) - The U.S. Labor Department said Thursday that wages and benefits for American workers rose at a surprisingly mild rate in the first quarter, another signal that inflation remains under control despite a strong economy.
The news triggered an immediate rally in the inflation-wary bond market, with the benchmark 30-year Treasury rising almost a full point in price after the data were released at 8:30 a.m. ET. The 30-year bond was trading up 19/32 for a yield of 5.536 by late morning.
The Labor Department said the Employment Cost Index (ECI), a closely watched economic indicator that tracks the total cost of labor, rose a slight 0.4 percent from January to March, compared with a 0.7 percent increase for the previous three-month period.
Analysts, who had predicted an increase of about 0.8 percent in the latest period, said they were surprised by just how negligible the rise in the index turned out to be. The expectation had been that as the job market becomes more robust, inflation pressure would tighten.
The figure is "the latest in a series of surprises," said Wayne Ayers, chief economist at BankBoston. "We really haven't seen any appreciable pressures on employment costs."
Although unemployment is at record lows and the labor market is tight, "it's not an easy market in general for workers to ask for higher wages," said Alan Levenson, chief economist at T. Rowe Price.
U.S. employers are able to tap into readily available import markets if need be, so "if you ask for a raise, you're employer may say, 'we'll close the factory,'" he said.
Worker pay rose by 0.5 percent in the first quarter, the weakest gain since September 1992, according to the index. Benefits costs rose 0.3 percent, the smallest increase in two years.
There have been some concerns that the robust U.S. economy may trigger a wave of price inflation, prompting the Federal Reserve to adjust interest rates. However, the small rise in the ECI, which measures wage, benefits and price increases, is seen as giving the Federal Reserve plenty of room to keep monetary policy steady.
The Fed "is going to be in a period of extended hold," Ayers predicted.
"I think the bond market is stuck in a reasonable tight range based on a long bond of 5.5 percent, and I think the Fed is going to do nothing," added Levenson.
In a separate report, the government released jobless claims data for the week ended April 24 that also defied analysts' expectations. Claims fell 20,000 to 294,000, compared with predictions of 310,000.
As for the effect on stocks, Brian Clifford, portfolio manager at SunAmerica Asset Management, said the labor data should particularly benefit smaller-cap growth issues dependent on a strong economy.
"What we're seeing this morning with the ECI number is this is really not the case," he said of fears that growth would lead to inflation. "We can have a moderate growth environment but have it not inflationary." 
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