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U.S. labor costs up solidly in fourth quarter

Waitress serves nachos at Tony's I-75 Restaurant in Birch Run, Michigan, October 15, 2006. REUTERS/Molly Riley

WASHINGTON (Reuters) - U.S. labor costs rose solidly in the fourth quarter, which could keep the Federal Reserve on track to raise interest rates this year.

The Employment Cost Index, the broadest measure of labor costs, increased 0.6 percent after an unrevised 0.7 percent gain in the third quarter, the Labor Department said on Friday.

Economists polled by Reuters had forecast the employment cost index rising 0.6 percent in the October-December period.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack.

Unlike the average hourly earnings (AHE) measure in the employment report, the ECI covers a broad range of workers and is weighted to eliminate composition effects, which economists say have distorted the AHE.

It is seen as a better predictor of core inflation. Wages and salaries, which account for 70 percent of employment costs, increased 0.5 percent in the fourth quarter.

They had gained 0.8 percent in the third quarter. The slowdown in the fourth quarter was flagged by a surprise decline in the average hourly earnings in December.

The Fed ramped up its assessment of the labor market on Wednesday, which economists interpreted as a signal for a mid-year rate hike.

In the 12 months through December, labor costs increased 2.2 percent. That is still below the 3 percent threshold that economists say is needed to bring inflation closer to the Fed's 2 percent target. Labor costs had increased 2.2 percent in the 12 months through September.

Wages and salaries were up 2.1 percent in the 12 months through December after a similar gain in the 12 months through September.

Benefit costs increased 0.6 percent in the fourth quarter. That followed a similar gain in the July-September period.

They increased 2.6 percent in the 12 months through December, the largest jump since March 2012, after rising 2.4 percent in the 12 months through September.



(Reporting by Lucia Mutikani; Editing by Paul Simao)