WASHINGTON, Oct 31 (Reuters) - U.S. labor costs accelerated in the third quarter amid increases in wages and benefits, leading to the biggest year-on-year increase in 2-1/2 years.
The Employment Cost Index, the broadest measure of labor costs, increased 0.7 percent after an unrevised 0.5 percent gain in the second quarter, the Labor Department said on Tuesday.
That lifted the year-on-year rate of increase to 2.5 percent, the largest rise since the first quarter of 2015.
Economists polled by Reuters had forecast the ECI rising 0.7 percent in the third quarter. Wage growth has remained stubbornly modest even as the labor market has tightened, with the unemployment rate at a 16-1/2 year low of 4.2 percent.
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 2.4 percent in the year to June.
Signs of a pickup in wage growth are likely to be welcomed by Federal Reserve officials, who are scheduled to begin a two-day policy meeting later on Tuesday. Steadily increasing wages offer hope that inflation could soon trend higher.
A government report on Monday showed the Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increasing 1.3 percent in the 12 months through September. The core PCE has undershot the Fed's 2 percent target for nearly 5-1/2 years.
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 percent of employment costs, rose 0.7 percent in the third quarter. They increased 0.5 percent in the second quarter. Wages and salaries were up 2.5 percent in the 12 months through September. That followed a 2.3 percent gain in the year to June.
Benefits for all workers increased 0.8 percent in the July-September quarter after rising 0.6 percent in the second quarter. They were up 2.4 percent in the 12 months through September. (Reporting by Lucia Mutikani; Editing by Andrea Ricci)