Sharp downgrades to US unit labor costs bode well for inflation outlook

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. unit labor costs grew far less than initially thought in the third quarter, pointing to a still favorable inflation outlook even though price increases have not moderated much in recent months.

The report from the Labor Department on Tuesday also showed labor costs actually declined in the second quarter instead of rising as had been estimated last month. Moderate labor costs growth is likely to be welcomed by Federal Reserve officials when they hold their last meeting of year next week.

The U.S. central bank is expected to cut interest rates by 25 basis points, the third reduction in borrowing costs since it started its monetary policy easing cycle in September.

"The labor market and wage growth are receding as a source of inflationary pressures," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

"The Fed has become less focused on the labor market as a source of inflationary pressures but likely still welcomes further signs of slowing wage growth, particularly since progress on other components of inflation has been even."

Unit labor costs - the price of labor per single unit of output - increased at a 0.8% annualized rate last quarter, the Labor Department's Bureau of Labor Statistics said.

Economists polled by Reuters had expected labor costs growth would be revised down to a 1.5% rate from the previously reported 1.9% pace in the July-September quarter.

That followed a downwardly revised 1.1% pace of decline in the second quarter. Labor costs were previously reported to have advanced at a 2.4% rate in the April-June quarter.

They increased at a 2.2% pace in the third quarter from a year ago, revised down from the previously reported 3.4% rate. The revisions reflected updated compensation data from the Bureau of Economic Analysis.

U.S. stocks were mixed. The dollar advanced against a basket of currencies. U.S. Treasury yields rose.

PRODUCTIVITY UNREVISED

A resilient economy, lack of progress lowering inflation to the Fed's 2% target and concerns over President-elect Donald Trump's proposed policies, including higher tariffs and mass deportations, have made the rate outlook next year unclear. The Fed's policy rate is now in the 4.50%-4.75% range.

It was hiked by 5.25 percentage points between March 2022 and July 2023. Data on Wednesday is likely to show the consumer price index increasing 0.3% in November after rising 0.2% for four straight months, a Reuters survey showed.

That would raise the year-on-year increase in consumer prices to 2.7% in November from 2.6% in October. Excluding the volatile food and energy components, the CPI was forecast to rise 0.3% for the fourth consecutive month, which would keep the annual increase in the so-called core CPI at 3.3%.