The markets have been digesting much employment data ahead of Friday’s unemployment report, but now the market will have to deal with some wage inflation. A Labor Department report on Thursday morning showed an uptick in weekly jobless claims, but another Labor Department report signaled that the Employment Cost Index rose by a seasonally adjusted 0.7% in the second quarter of 2014. Dow Jones was calling for only 0.5% growth here, as was Bloomberg.

What investors need to consider is that this is measured as a quarterly reading, compared to the prior quarter. If you use it on an annualized basis, then the Employment Cost Index was up 2.0%. This means that the cost of employee wages, salaries and benefits rose by 2% from a year earlier.

The wages and salaries component, which is close to 70% of the Employment Cost Index, was up by 0.6% from the prior quarter. That was the highest gain since 2008. The benefit cost component was up by 1.0% from the prior quarter.

While 2.0% from a year earlier may be weak compared to the 3% or even 4% gains from before the recession, this is still a hot number. Most important is that wages are finally rising.

Keep in mind that the Employment Cost Index is represented as being the broadest measure of labor costs. It includes wages, salaries and total benefits. We would just expect that this will be the last real bit of labor data outside of PMI ahead of Friday’s unemployment report from the Labor Department. The key estimates for July are as follows:

• 6.1% unemployment, flat versus the prior month.
• Nonfarm payrolls expected to be up 233,000, versus 288,000 the prior month.
• Private sector payrolls expected to rise 233,000, versus 262,000 the prior month.
• Average hourly earnings expected to be up 0.2%.
• Average hourly workweek expected to be flat at 34.5 hours.

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