By Lucia Mutikani

WASHINGTON (Reuters) -U.S. labor costs increased more than expected in the first quarter amid a rise in wages and benefits, confirming the surge in inflation early in the year that will likely delay a much- anticipated interest rate cut later this year.

The pick-up in labor costs reported by the Labor Department on Tuesday was despite signs of some easing in labor market conditions. Federal Reserve officials were due to start a two-day policy meeting on Tuesday.

"Fed Chair Powell has said wages were not the key to the nation's inflation outlook, but employment costs remain sticky and certainly won't help in the war on inflation," said Christopher Rupkey, chief economist at FWDBONDS.

The Employment Cost Index (ECI), the broadest measure of labor costs, increased 1.2% last quarter after rising by an unrevised 0.9% in the fourth quarter, the Labor Department's Bureau of Labor Statistics said.

Economists polled by Reuters had forecast the ECI would advance 1.0%. Labor costs increased 4.2% on a year-on-year basis after rising by the same margin in the fourth quarter.

The ECI is viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.

The report followed data last week that showed price pressures heating up in the first quarter.

FED ON HOLD

The U.S. central bank is expected to leave its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July.

The Fed has raised the policy rate by 525 basis points since March 2022. Financial markets have pushed back expectations of a rate cut this year to September from June.

A handful of economists continue to expect that borrowing costs may be lowered in July in the belief that the labor market will slow noticeably in the coming months. Others believe the window for the Fed to start its easing cycle is closing.

Wages increased 1.1% in the January-March quarter after advancing by the same margin in the prior three months. They jumped 4.4% year-on-year after rising 4.3% in the fourth quarter. Private sector wages rose 1.1% after gaining 1.0% in the prior quarter. They gained 4.3% in the 12 months through March. Wage gains remain above their pre-pandemic levels.

Annual compensation costs increased 5.3% for union workers and were up 3.9% for non-union workers. Wages and salaries for union workers shot up 6.3% compared to the 4.1% rise for non-union workers in the 12 months through March.

State and local government wages accelerated 1.4% after rising 1.1% in the prior quarter. They surged 5.0% year-on-year after gaining 4.7% in the fourth quarter.

Inflation-adjusted wages for all workers increased 0.9% year-on-year after rising 1.0% in the fourth quarter, helping to underpin consumer spending and the overall economy.

Benefits increased 1.1% after gaining 0.7% in the October-December quarter. They advanced 3.7% year-on-year.

"Overall, the ECI suggests, like many labor market indicators, that the labor market has remained tight lately, even though the imbalance between labor demand and labor supply has been reduced in recent years," said Daniel Silver, an economist at JPMorgan.