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Pay outpaces productivity; inflation feared

WASHINGTON -- Growth in productivity -- the key ingredient for rising living standards -- skidded to a standstill in the late summer while workers' wages and benefits shot up at the fastest clip in more than two decades.

The combination of slowing productivity and rising wages could be a formula for inflation troubles down the road. It could keep the Federal Reserve from cutting interest rates any time soon and possibly lead to another increase.

Productivity, the amount of output per hour of work, showed no growth at all from July through September. Growth was just 1.3 percent over the past 12 months, the weakest showing in nine years.

The cost of wages and benefits measured by each unit of output grew at an annual rate of 3.8 percent in the third quarter.

Employee compensation climbed by 5.3 percent over the past year. That gain matched a 12-month increase ending in late 1990 and was the fastest since a 5.8 percent rise in the 12 months ending in the fourth quarter of 1982.

Both the extent of the weakness in productivity and the size of the increase in unit labor costs caught analysts by surprise. They said the numbers are certain to raise concerns at the Fed about future inflation risks.

Higher wages and benefits are good news for workers. But such increases can trigger inflation if companies pass on the higher wage costs by making products more expensive.

Rising productivity lets firms pay their workers more from the increased production rather than having to finance wage increases through price increases.

Companies could pay the higher salaries from their profit margins, which have jumped in recent years, but that would mean less in returns for shareholders.

In other economic news, orders to U.S. factories for manufactured goods rose by 2.1 percent in September. While that was the biggest increase in six months, it was heavily influenced by a huge surge in demand for commercial aircraft. Outside of transportation products, factory orders actually fell by 2.4 percent.

The Fed raised interest rates 17 consecutive times through June of this year to slow the economy enough to bring inflation pressures under control. The Fed has left rates unchanged for three straight meetings, hoping it has done enough to brake economic growth.

But the significant slowing in productivity growth and the continued rise in wage pressures could prompt the Fed to resume raising interest rates to fight inflation, analysts said.

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