WASHINGTON (Reuters) – U.S. labor costs increased more than expected in the first quarter as wage growth picked up, further evidence that inflation will push higher this year as the economy reopens.

The Employment Cost Index, the broadest measure of labor costs, jumped 0.9% last quarter after gaining 0.7% in the October-December quarter. That lifted the year-on-year rate of increase to 2.6% from 2.5% in the fourth 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 rising 0.7% in the first quarter.

Wages and salaries shot up 1.0% after advancing 0.8% in the fourth quarter. They were up 2.7% year-on-year. Economists expect wages will increase further in the second quarter as companies compete for scarce workers.

Despite employment being 8.4 million jobs below its peak in February 2020, businesses are struggling to find suitable workers as they rush to meet robust domestic demand.

Federal Reserve Chair Jerome Powell on Wednesday acknowledged the worker shortage saying “one big factor would be schools aren’t open yet, so there’s still people who are at home taking care of their children, and would like to be back in the workforce, but can’t be yet.”

Higher wages, if the worker scarcity persists, could contribute to boosting inflation this year, though many economists and Powell believe the anticipated surge in price pressures as the broader economy reopens will be transitory.

(Reporting By Lucia Mutikani)