WASHINGTON (Reuters) - U.S. labour costs increased solidly in the fourth quarter and growth in compensation is expected to accelerate as a tightening labour market forces employers to raise wages to retain and attract workers.
The Employment Cost Index (ECI), the broadest measure of labour costs, increased 0.6 per cent after an unrevised 0.7 per cent rise in the third quarter, the Labor Department said on Wednesday. That lifted the year-on-year rate of increase to 2.6 per cent, the largest increase since the first quarter of 2015, from 2.5 per cent in the third quarter.
Economists polled by Reuters had forecast the ECI rising 0.6 per cent in the final three months of 2017.
Wages and salaries, which account for 70 per cent of employment costs, rose 0.5 per cent in the fourth quarter after advancing 0.7 per cent in the prior period. Wages and salaries were up 2.5 per cent 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 labour market, which is forecast to hit full employment this year. The unemployment rate is at a 17-year low of 4.1 per cent and economists expect it to drop to 3.5 per cent 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 and FedEx 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 labour market slack. It is also considered a better predictor of core inflation. Economists say labour costs need to rise by at least three per cent to push inflation closer to the U.S. central bank's two per cent inflation target. Labor costs increased 2.5 per cent 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 per cent in the fourth quarter. They were up 2.8 per cent in the 12 months through December, the biggest increase since the first quarter of 2015. That followed a 2.6 per cent gain in the year to September.
Benefits for all workers increased 0.5 percent in the October-December quarter after rising 0.8 per cent in the third quarter. They were up 2.5 per cent in the 12 months through December after rising 2.4 per cent in the year to September.