Data Raise Fears on Prices, Rates

Labor costs have risen more robustly this year than first thought, according to a government report issued Wednesday, increasing concerns that the Federal Reserve may start raising interest rates again to contain inflation.

The Labor Department also reported that business productivity, a measure of worker output and a key to rising living standards, grew faster in the second quarter than initially estimated. A separate survey showed the service sector grew more than expected in August.

“You have a very pronounced acceleration in [unit labor costs] and the people at the Fed who are concerned about entrenched inflation will regard this as a very grave development,” said Pierre Ellis, senior economist at Decision Economics Inc. in New York.

The Labor Department’s report indicated that hourly worker compensation shot up 13.7% in the first quarter, well above the 6.9% gain initially reported. In the second quarter, the department said, compensation per hour rose at a more subdued, but still strong, 6.6% pace.

With investors eager to see whether the Federal Reserve’s prediction that moderating economic growth will soften price pressures is coming true, the data may worry those who are betting that the Fed’s tightening campaign is over.

The gains in worker compensation helped push unit labor costs -- a gauge of inflation and profit pressures -- up 5% in the last year, the largest increase since a matching rise in the period ended in the third quarter of 2000.

In the first quarter, unit labor costs rose 9% and they rose 4.9% in the April-June period, well ahead of the 3.8% gain economists had expected.

The service sector, which includes businesses as diverse as hair salons and custodial services, also showed signs of strength in recent weeks. The Institute for Supply Management’s service index rose to 57 in August from 54.8 in July. The median forecast of Wall Street economists was for an increase to 55.

“This is a report that improves near-term economic prospects while suggesting that the Fed may not be finished at reining in inflation risks,” John Lonski, chief economist at Moody’s Investors Service in New York, said of the service sector report.

The Federal Reserve held interest rates steady at its meeting last month, but some analysts say it may not have finished tightening credit.

The Labor Department said U.S. productivity had risen 2.5% over the last year, a solid increase in line with gains seen since the mid-1990s.

Although some economists have worried that U.S. productivity growth might slow, imparting further upward pressure on inflation, Fed Chairman Ben S. Bernanke said last week the beneficial trend seen since the mid-1990s would probably stay in place.

Separately, the Mortgage Bankers Assn. said applications for U.S. home mortgages edged higher last week from one week before as lower loan rates helped encourage more home purchases.