WASHINGTON - Labor costs for U.S. businesses increased more than expected in the fourth quarter as payments for health insurance and other benefits showed the biggest gain in almost seven years.

The employment cost index rose 1.1% in the last three months of 1999, the Labor Department said. Analysts had expected a 0.9% increase.

The index - the broadest measure of what businesses spend on wages, salaries, and benefits - had risen 0.8% the previous quarter.

Labor costs rose 3.4% during all of 1999, the same as the year earlier. Federal Reserve policymakers closely watch employment expenses for signs of accelerating inflation.

"The tight labor markets could now be starting to apply some upward pressure on compensation, but you may want to reserve a little judgment," said Kevin Flanagan, an economist at Morgan Stanley Dean Witter in New York.

A separate government report showed that the economy grew at a 5.8% annual rate in the final three months of 1999 and the price deflator, a measure of inflation, rose a faster-than-expected 2%. For all of last year, the economy grew 4%, after gaining 4.3% in 1998 and 4.5% in 1997.

The last time the economy grew 4% or more for three years in a row was 1976-1978.

Stock and bond markets fell on news of the two reports. The Federal Reserve's Open Market Committee is to meet Tuesday and Wednesday to decide whether to change the overnight bank lending rate and by how much. Many analysts expect a 25-basis-point increase, to 5.75%.

--Bloomberg News

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