This measure of labor costs can signal when inflation's on the way

The cost of employing a worker rose 0.8% during the third quarter of this year, according to the seasonally adjusted Employment Cost Index released Friday morning by the Bureau of Labor Statistics. That’s down from 0.9% in Q2.

Odds are you’ve never heard of this particular economic indicator, but the ECI tells us a lot about how companies are compensating their workers and, in turn, something about the broader economy.

The Employment Cost Index measures the average cost of having an employee.

The index comes out quarterly, said Ryan Nunn, a labor economist at the Yale Budget Lab. It’s based on a survey of businesses, “and we’re getting information about total compensation and not just wages.”

So that includes the cost of benefits: paid time off, health insurance, a 401(k). The Employment Cost Index can give economists a heads up about a problem that’s been plaguing this economy, said Tuan Nguyen, an economist at RSM.

”The Employment Cost Index is a very important leading indicator for inflation,” he said.

Nguyen said the index can predict inflation three, six, or even 12 months down the road, because employers might pass higher labor costs on to their customers by raising prices. And if workers earn more, they tend to spend more, which pushes up demand and can also lead to even higher prices.

The Federal Reserve may be paying extra attention to the ECI now, said Allison Schrager, a senior fellow at the Manhattan Institute.

“The economy is just kind of weird right now,“ she said. “We have booms in some areas, slowdowns in others.”

Schrager sees the Employment Cost Index as a bright beacon in an ocean of uncertainty, even though it doesn’t make the headlines.