A closely watched gauge of U.S. labor costs rose more than expected in the fourth quarter but year-on-year growth remains below pre-pandemic levels.

The Labor Department reported that the employment cost index (ECI) increased 0.7% in the last three months of 2020 after gaining 0.5% in the third quarter. Economists polled by Reuters had forecast the ECI climbing 0.5% in Q4.

The index measures pay changes for workers who keep their jobs. Over the past 12 months, it rose 2.5% from 2.4% in the third quarter. Before the coronavirus pandemic, it grew at a 2.8% rate year over year.

In the fourth quarter, wages and salaries — which account for some 70% of employment costs — increased 0.9% after gaining 0.4% in the third quarter while benefits rose 0.6%, matching the third-quarter increase.

“Overall, compensation costs are likely to remain subdued going forward, reflective of a high level of unemployment that will restrain wages,” said Rubeela Farooqi, an economist with High Frequency Trading.

Employers shed jobs in December for the first time in six months, and the unemployment rate remained at 6.7% for the second consecutive month. The economy still has 9.8 million fewer jobs than before the pandemic, more than were lost in the 2008-2009 recession.

Even though the wage gains were modest last year, they still outpaced 2020 inflation of 1.4%, which is well below the Federal Reserve’s 2% target. “Analysts believe inflation will remain subdued as the U.S. economy struggles to break out of a pandemic-induced downturn,” the Associated Press said.

However, Reuters said the fourth-quarter increase in the ECI, which is widely viewed by policymakers and economists as a predictor of core inflation, supports views that inflation could accelerate this year.

“Price pressures are also seen boosted by a strengthening in economic growth, driven by fiscal stimulus and the inoculation of more Americans against COVID-19,” Reuters said.

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