U.S. labor costs increase solidly in the fourth quarter

WASHINGTON (Reuters) - U.S. labor costs increased solidly in the fourth quarter and growth in compensation is expected to accelerate as a tightening labor market forces employers to raise wages to retain and attract workers.

FILE PHOTO - Constructions workers are seen at a new building site in Silver Spring, Maryland, U.S. June 2, 2016. REUTERS/Gary Cameron

The Employment Cost Index, the broadest measure of labor costs, increased 0.6 percent after an unrevised 0.7 percent rise in the third quarter, the Labor Department said on Wednesday. That lifted the year-on-year rate of increase to 2.6 percent, the largest increase since the first quarter of 2015, from 2.5 percent in the third quarter.

Economists polled by Reuters had forecast the ECI rising 0.6 percent in the final three months of 2017.

Wages and salaries, which account for 70 percent of employment costs, rose 0.5 percent in the fourth quarter after advancing 0.7 percent in the prior period. Wages and salaries were up 2.5 percent in the 12 months through December. That followed a similar gain in the year to September.

Wage growth is expected to get a boost from a strong labor market, which is forecast to hit full employment this year. The unemployment rate is at a 17-year low of 4.1 percent and economists expect it to drop to 3.5 percent by the end of 2018.

A $1.5 trillion tax cut package pushed through by the Trump administration and the Republican-controlled U.S. Congress in December is also expected to bolster compensation growth. The tax cut has resulted in some companies either paying out one-time bonuses or raising wages for employees.

Companies like Starbucks Corp SBUX.O and FedEx Corp have announced they will use some of the savings from the tax cut to boost wages for workers.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack. It is also considered a better predictor of core inflation. Economists say labor costs need to rise by at least 3 percent to push inflation closer to the U.S. central bank’s 2 percent inflation target. Labor costs increased 2.5 percent in the year to September.

Federal Reserve officials were scheduled to resume a two-day meeting on Wednesday. The U.S. central bank is expected to leave interest rates unchanged at the end of the meeting. The Fed has forecast three rate hikes this year. It increased borrowing costs three times in 2017.

Private sector wages and salaries rose 0.6 percent in the fourth quarter. They were up 2.8 percent in the 12 months through December, the biggest increase since the first quarter of 2015. That followed a 2.6 percent gain in the year to September.

Benefits for all workers increased 0.5 percent in the October-December quarter after rising 0.8 percent in the third quarter. They were up 2.5 percent in the 12 months through December after rising 2.4 percent in the year to September.

Reporting By Lucia Mutikani; Editing by Andrea Ricci