Friday’s news of a smaller-than-expected rise in the employment cost index (ECI) in the second quarter has cast doubt on the prospect of an early Fed rate move. Annual growth in the ECI wages and salaries component fell from 2.6% to 2.1%, exactly reversing a first-quarter increase, despite evidence from job openings and other indicators of a tight labour market – see first chart.

The details, however, reveal that the decline was entirely due to a fall in wage growth in incentive-paid service occupations, following a sharp rise in the first quarter. Excluding all incentive-paid occupations, the annual ECI wage increase was stable, at 2.0%. In goods-producing industries, annual growth including incentive pay rose to 2.4%, a seven-year high  – second chart.

The volatility of incentive pay suggests averaging the first and second quarter results. Annual growth of total pay was 2.3% in the first half, up from 2.1% in the second half of 2014.

The second-quarter setback, therefore, is unlikely to be a deal-breaker for a September Fed move, although this will require further solid payrolls growth in July / August and other evidence that recent faster GDP expansion is being sustained.

In other inflation-related news last week, the housing rental vacancy rate fell to its lowest level since 1985 last quarter, suggesting a further pick-up in rental growth – third chart. Actual and imputed rents account for a combined 40% of the core CPI basket (i.e. excluding food and energy).