The 0.7 Percent Print That Silenced The Hawks
0.7 percent. That is the number that effectively neutralized the narrative of a wage-price spiral. The Bureau of Labor Statistics reported that the Employment Cost Index (ECI) for the third quarter of 2025 rose by a seasonally adjusted 0.7 percent. This figure represents a sharp deceleration from the 0.9 percent recorded in the second quarter and landed significantly below the 1.1 percent seen at the start of the year. For the Federal Reserve, this is the most critical data point ahead of the December 17 policy meeting. It confirms that labor-driven inflation is no longer the primary threat to the 2 percent price stability target.
Market mechanics reacted with clinical precision to this release. According to the latest data tracked by Bloomberg Markets, the yield on the 10-year Treasury note retracted to 4.12 percent as traders priced out the risk of a mid-winter rate hike. The ECI is often considered the gold standard for measuring labor costs because it accounts for changes in the composition of the workforce, unlike the more volatile Average Hourly Earnings (AHE) metric. By stripping out the noise of industry shifts, the ECI provides a transparent view of the actual cost pressures businesses face.
Deconstructing The Benefit Cost Deceleration
Total compensation costs for civilian workers are comprised of two main pillars: wages and benefits. In the third quarter, wages and salaries rose by 0.8 percent; however, the real story lies in the benefit costs, which grew by a mere 0.5 percent. This is a massive shift from the 1.0 percent benefit growth observed in late 2024. The primary driver here is the stabilization of health insurance premiums and a reduction in performance-based bonuses across the financial and professional services sectors. Businesses are no longer in a desperate bidding war for talent; they are in a phase of retention and optimization.
As reported by Reuters in their December 9 market wrap, the cooling labor market is also reflected in the falling “Quit Rate,” which has retreated to 2.1 percent from its post-pandemic peak. When fewer employees leave their jobs for higher-paying roles elsewhere, the upward pressure on wages naturally dissipates. This internal stability allows corporations to maintain margins without aggressively raising prices for the end consumer. The technical mechanism of this slowdown is a return to historical norms where productivity gains, rather than labor shortages, dictate compensation increases.
Sector Divergence and The Death of The Phillips Curve
The aggregate 0.7 percent figure masks significant variance across different sectors of the economy. Service-providing industries saw a 0.8 percent increase, whereas goods-producing industries slowed to a 0.6 percent growth rate. This divergence is critical for investors. Manufacturing sectors are seeing the effects of high interest rates on capital expenditure, leading to a freeze in wage expansion. Conversely, the healthcare sector continues to see persistent cost pressures, with a 0.9 percent quarterly increase due to chronic staffing shortages in specialized roles.
The traditional Phillips Curve model suggests that low unemployment must lead to high inflation. In December 2025, this model appears broken. Unemployment remains at a healthy 3.9 percent, yet wage growth is cooling rapidly. This phenomenon is driven by an increase in the labor participation rate, which reached 62.9 percent this quarter. The entry of more workers into the market has expanded the supply of labor, meeting demand without requiring hyper-inflationary salary increases. Institutional investors are shifting capital into consumer discretionary stocks as the threat of a “higher for longer” interest rate environment fades.
A Technical Look At Real Wages
While nominal wages rose by 0.7 percent in the third quarter, the calculation of “Real Wages” depends entirely on the upcoming November Consumer Price Index (CPI) data. If the CPI print on December 12 shows a monthly increase of 0.2 percent or less, real wage growth will remain positive. This is the sweet spot for the economy: workers gain purchasing power while the overall cost of labor remains sustainable for employers. According to analysis found on Yahoo Finance, this balance is the primary reason why retail sales figures have remained resilient despite the broader economic cooling.
The 20-basis point delta between the forecasted 0.9 percent and the actual 0.7 percent ECI print has effectively given the Federal Reserve the “green light” to consider a 25-basis point rate cut in its final meeting of the year. The Fed Funds futures market now reflects a 78 percent probability of such a cut, up from 52 percent prior to the ECI release. The risk of over-tightening is now perceived as greater than the risk of a wage-driven inflation resurgence.
Forward Looking Milestone
The market now pivots its focus to the January 30, 2026, release of the fourth-quarter Employment Cost Index summary. This data point will confirm if the Q3 deceleration was a structural shift or a temporary seasonal anomaly. Traders should specifically watch for the ‘Compensation for Private Industry’ sub-index; a print below 0.6 percent in that category would likely trigger a massive rally in long-duration assets.
