March 6 (Bloomberg) -- U.S. worker productivity last quarter grew less than the government initially estimated, and labor costs accelerated more than forecast, suggesting inflation pressures persist.

Productivity, a measure of how much an employee produces for each hour of work, rose at an annual rate of 1.6 percent, less than the 3 percent pace reported last month, the Labor Department said today in Washington. A measure of labor costs jumped at a 6.6 percent rate, reflecting a one-time increase in bonuses.

The figures make it less likely Federal Reserve policy makers will reduce interest rates in coming months even as the economy shows signs of cooling. The smaller gain in efficiency follows revisions last week that showed a slower pace of economic growth during the fourth quarter than first estimated.

``The rise in labor costs suggests an increase in inflation pressures,'' Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said before the report. ``Although this number may have been skewed by fourth-quarter bonuses, when the Fed sees an acceleration in labor costs it's going to be a concern.''

Economists had forecast a 1.5 percent rate of increase in fourth-quarter productivity, according to the median of 64 forecasts in a Bloomberg News survey. Unit labor costs, which are adjusted for efficiency gains, were projected to rise at a 3.2 percent pace after a previously reported 1.7 percent gain.

The revisions follow the government's Feb. 7 preliminary estimate. Productivity fell at an annual rate of 0.5 percent in the third quarter, while labor costs rose 1.1 percent.

For all of last year, productivity increased 1.6 percent, the slowest since 1997. Labor costs in 2006 rose 3.2 percent, the most in six years.

Bernanke and Labor Costs

Fed Chairman Ben S. Bernanke said last month that higher labor costs, which account for about two-thirds of the cost of goods and services, remain an inflation risk because companies could pass higher compensation costs through to prices.

Some economists boosted their estimates for fourth-quarter labor costs after a government report last week showed a jump in incomes last quarter. A one-time increase in bonuses and stock- option grants lifted income figures in the report, suggesting such gains are unlikely to be repeated this quarter.

The rise in such costs ``mostly reflects new assumptions about bonus and stock-option earnings in the fourth quarter,'' Patrick Newport, an economist at Global Insight Inc., said in a note to clients. ``It far overstates the underlying increase in labor costs.''

Hours Worked

Hours worked rose at a 0.9 percent pace last quarter, compared with a 1.2 percent increase the government initially reported and down from a 2.4 percent increase in the previous three months. Output rose at a 2.5 percent rate last quarter, less than the 4.2 percent rate the government first estimated. Output rose 1.9 percent in the third quarter.

Productivity rose last quarter because the gain in hours worked was smaller than the increase in output.

Compensation for each hour worked jumped at an annual rate of 8.2 percent in the fourth quarter, compared with 4.8 percent the government's earlier report and a 0.6 percent rate in the prior three months.

Among manufacturers, productivity increased at a 2.2 percent rate after a 5.9 percent rate the prior quarter.

Productivity at non-financial corporations, a measure watched by the Fed, rose at a 4.1 percent rate in third quarter, slower than the initial 5.7 percent estimate. It fell 4.4 percent in the previous three months. The figures are released with a one-quarter lag.

Fourth-Quarter Growth

A Feb. 28 report from the Commerce Dept. showed the U.S. economy grew at an annual rate of 2.2 percent in the fourth quarter, slower than the 3.5 percent rate the government first estimated.

Today's productivity report also reflects benchmark revisions to the Labor Department's January payrolls data, which boosted the estimate of the number of jobs the economy added during the year ended March 2006. The revisions suggest it took more workers than the government had calculated to make the amount of goods produced during that period.

Fed policy makers have credited productivity growth with helping stem inflation pressures during the current expansion. Before today's report, quarterly productivity increases averaged 3 percent during the expansion that started in later 2001, up from 2.2 percent during the record 10-year expansion from 1991 to 2001.

Effect on Inflation

The slowdown in productivity last year after increasing 2.1 percent in 2005 suggests efficiency gains will provide less assistance in keeping a lid on inflation. Signs that efficiency gains are slowing haven't escaped notice among central bankers.

Fed Bank of St. Louis President William Poole said in a Feb. 21 interview that he was concerned about ``the trend of declining productivity growth,'' which might limit the rate of economic expansion that can be achieved without sparking inflation.

Bernanke said last month that a tight labor market is an ``important'' inflation risk.

Still, companies facing slower profit growth and elevated energy costs will keep striving to make their operations more efficient, suggesting productivity won't falter altogether, said Michael Gregory, a senior economist at BMO Capital Markets in Toronto.

``Our customers are still investing heavily in productivity improvements,'' said Harry Volande, executive vice president and chief financial officer at Siemens Energy & Automation Inc., in an interview March 1. Siemens Energy & Automation makes electronic equipment used in factories and construction, and is a unit of Germany's Siemens AG.

`Tilting Down'

The Fed's Poole said inflation is ``tilting down,'' and Bernanke said in congressional testimony last month that ``there are some indications inflation pressures are beginning to diminish.''

Economists said slower economic growth will prompt companies to pull back on hiring in coming months, helping relieve wage pressures.

The unemployment rate will rise to 4.8 percent by year-end, from 4.6 percent in the first quarter, based on the median estimate of economists surveyed by Bloomberg News Feb. 1 to Feb. 8. Growth will average 2.5 percent this year, down from 3.4 percent in 2006, according to the survey.

The Fed kept its benchmark U.S. interest rate at 5.25 percent on Jan. 31, saying inflation is slowing ``modestly.'' It next meets on March 20-21.

Last Updated: March 6, 2007 08:30 EST