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

Construction workers wait in line to do a temperature test to return to the job site
Construction workers wait in line to do a temperature test to return to the job site after lunch, amid the coronavirus disease (COVID-19) outbreak, in the Manhattan borough of New York City, New York, U.S., November 10, 2020. REUTERS/Carlo Allegri/File Photo

WASHINGTON, Jan 28 (Reuters) - U.S. labor costs increased strongly in the fourth quarter, pointing to a rapidly tightening jobs market and supporting the Federal Reserve's shift towards raising interest rates.

The Employment Cost Index, the broadest measure of labor costs, rose 1.0% last quarter after increasing 1.3% in the July-September period, the Labor Department said on Friday.

Labor costs surged 4.0% on a year-on-year basis, the largest rise since 2001, after increasing 3.7% in the third quarter.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes. Economists polled by Reuters had forecast the ECI advancing 1.2% in the fourth quarter.

The labor market is viewed as being at or near maximum employment. There were 10.6 million job openings at the end of November. The Fed on Wednesday said it was likely to raise interest rates in March. read more

Wages and salaries rose 1.1% last quarter after increasing 1.5% in the third quarter. They were up 4.5% year-on-year. Benefits rose 0.9% after a similar gain in the July-September quarter.

Annual inflation is increasing at a pace last seen four decades ago and is well above the Fed's 2%.

Reporting by Lucia Mutikani

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