What Exactly Does The Employment Cost Index (ECI) Measure?
The Employment Cost Index basically measures the cost of doing business. It measures monthly changes in such crucial variables as employee's wages, employment benefits, and job bonuses. The ECI is so important that it even helps define monetary decisions and policies of the Federal Reserve.
Tie In With Inflation
Comparing the inflation rate to changes in monthly employee wages is crucial in accessing whether or not wages are keeping up with current price levels. For instance, if the current inflation rate is 3% per year, and employee wages are increasing at a rate of 2% per year, then even though wages are increasing overall, they're actually decreasing when compared to actual living expenses. That could negatively affect the economy (i.e. less consumer spending), and in the long run, affect a country's currency exchange rate. On the other hand, if wages are increasing at a rate of 3% per year, along with healthy increases in employment benefits and job related bonuses (overall compensation package), and inflation is only at 2% per year, then the overall economy will benefit, as will the nation's currency rate.
It Might Be A Lagging Indicator, But It's Still Important!
Even though the ECI is a lagging indicator (follows after economic change), it's still an important factor to base market strategies upon. The ECI (whether up or down) basically validates a particular economic environment, and can help the investor solidify an overall trading strategy. Let's say the economy is showing signs of weakness for the past few months, but there are overall conflicting reports. The ECI report comes out and validates the economic findings of a weakening economy (i.e. lower employee wages), which in turn, can negatively affect a country's currency exchange rate. With this information, the investor can make the necessary strategic decisions when investing in the Forex market.
by Harman Gilly
