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Last Updated: Thursday, 4 May 2006, 15:20 GMT 16:20 UK
Boost to US workers' productivity
Woman waving a US flag
The US economy is growing at an annual rate of 4.8%
US workers upped their productivity in the first quarter of 2006, according to the Labor Department, but their rising wages are posing a threat to inflation.

Productivity rose at an annual rate of 3.2% between January and March, compared with a 0.3% fall seen in the last three months of 2005.

But wage costs rose at an annual rate of 2.5%, nearly double the forecast.

This puts pressure on inflation, making the Federal Reserve think hard about any pausing of its interest rate hikes.

Mr Bernanke's concerns

The key US lending rate has risen for 15 months in a row to 4.75% as the Fed has sought to tighten the credit supply and cut inflation risks.

Last month Fed chairman Ben Bernanke suggested that a pause in this cycle of rate rises might be imminent as the US economy hit a sustainable level of economic growth.

While the productivity gain is quite desirable, the increase in unit labour costs is going to rub the Federal Reserve the wrong way
Richard Yamarone, Argus Research

Improved productivity boosts the economy without putting any pressure on inflation because increased output allows companies to pay staff more without raising their prices.

But too high a level of wage increases does put pressure on inflation, and could force the Fed to use higher rates to damp it down.

Mr Bernanke said high energy prices could pose a similar threat.

It is the Federal Reserve's job to balance inflation with economic growth, although it does not have an explicit inflation target, unlike the Bank of England or European Central Bank.

"While the productivity gain is quite desirable, the increase in unit labour costs is going to rub the Federal Reserve the wrong way," said Richard Yamarone, an economist at Argus Research.

Many analysts expect the Federal Reserve to increase rates by another quarter percentage point to 5% next week.


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