Tech Inflates on Benign Data

Cisco's (CSCO Quote) at the disco and Ben Bernanke's feeling groovy. But this isn't a 1970s flashback.

Between Cisco's earnings and the latest data to fall in line with the Fed's paradigm shift about core inflation moderating, the market's mood lifted Wednesday.

It turns out that despite last summer's record-high oil prices, there is no repeat of the 1970s inflation fiasco, a notion that Wednesday's data on unit labor costs helped confirm.

Oil has come back down, and consumer prices never spiked along the way. Core inflation, as measured by the core personal consumption expenditures index, now runs at a 2.1% year-over-year rate, down from 2.4% through October of last year.

And even though the labor market has been unflinchingly strong throughout a housing recession and growth slowdown in the middle of 2006, it is not nearly as stretched as it could be. Wage inflation is not yet a problem.

Investors took today's benign inflation data to reinforce their belief that the Fed is on the sidelines. This is just where Chairman Bernanke wants investors to be.

In the fourth quarter, productivity increased by 3%, much more than analysts' expectations for a 2% jump, and a sharp rebound from the third quarter's 0.1% decline (revised from a previously reported 0.2% gain). Hourly compensation accelerated to a 4.8% gain in the fourth quarter, but due to the strong 3% productivity, unit labor costs rose only 1.7%, less than the 2.1% rise analysts expected.

That means from the same period last year, labor costs rose 2.8%. Unit labor costs peaked at 3.6% annual rate in the first quarter of 2006, and have since been trending lower, writes Gary Bigg, economist at Bank of America.