Productivity slows, fueling inflation fears
United States worker productivity slowed while labor costs rose in the second quarter of 2006, prompting fears of coming inflation. Productivity, which measures worker output per hour, inched up 1.1 percent, according to a report today from the Bureau of Labor Statistics. While that was above the 0.9 percent economists had predicted, it's down from first-quarter productivity gains of 4.3 percent in the nonfarm business sector. Meanwhile, labor costs also spiked 4.2 percent, the highest rise since the fourth quarter of 2004 and up from 2.5 percent in the first quarter of the year.
The news could influence today's Federal Reserve meeting over whether to raise interest rates.
"It's a warning shot across the Fed's bow," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa. The Fed has raised the key interest rate in 17 consecutive quarters over two years. Many have predicted those raises will halt when the Fed announces its rate decision this afternoon. Fed Chairman Ben Bernanke had suggested a pause, telling Congress last month that slowing growth would contain inflation. But the slowdown in productivity is likely to raise eyebrows. Slowing worker output combined with rising salaries means that producers could pass on costs to consumers.
"The Fed is facing a very difficult situation" between containing inflation and spurring growth, said Naroff. "It may not change the decision [to halt rising rates], but it puts pressure on them to make comments about how they are monitoring inflation."
advertisement
