U.S. labor costs rise modestly in fourth quarter

January 31, 2017 09:38 AM

U.S. labor costs rose less than expected in the fourth quarter, pointing to low inflation even as anecdotal evidence suggests that wage growth is picking up as the labor market tightens.

The Employment Cost Index, the broadest measure of laborcosts, increased 0.5 % after rising 0.6 % in the third quarter, the Labor Department said on Tuesday.

That slowed the year-on-year rate of increase to 2.2 % from 2.3 % in the year to September. Economists polled by Reuters had forecast the ECI rising 0.6 % in the fourth quarter.

The dollar extended losses against a basket of currencies on the data, while prices for U.S. government bonds were mostly higher. U.S. stock index futures slipped.

Despite the moderate rise in employment costs, anecdotal evidence suggest wage growth is accelerating amid efforts by companies to retain and attract skilled workers. Minimum wage increases being implemented by some states are also boosting wage growth.

The Federal Reserve's latest Beige Book showed wages in some districts were being pushed up "a bit" by increases in the minimum wage and that most districts reported that wage pressures had increased.

The Fed said information from many districts indicated that labor markets were expected to "continue to tighten in 2017, with wage pressures likely to rise."

Economists say labor costs need to rise by at least 3 % on a year-on-year basis to push inflation closer to the U.S. central bank's 2 % inflation target.

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.

Wages and salaries, which account for 70 % of employment costs, increased 0.5 % in the fourth quarter. They increased by the same margin in the third quarter.

Wages and salaries were up 2.3 % in the 12 months through December. That followed a 2.4 % gain in the year to September. Benefits for all workers increased 0.4 % in the October-December quarter after rising 0.7 % in the third quarter.

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