WASHINGTON (REUTERS) - US labour costs rose modestly in the fourth quarter, pointing to benign wage inflation that should allow the Federal Reserve to continue its monetary stimulus program to nurse the sluggish economy.

The Employment Cost Index, the broadest measure of labour costs, increased 0.5 per cent after rising 0.4 per cent in the third quarter, the Labour Department said on Thursday.

The increase was in line with expectations. In the 12 months through December, compensation costs advanced 1.9 per cent.

During periods of strong economic growth, the US central bank closely monitors the index for signs of wage inflation.

High unemployment amid a lacklustre economic recovery is keeping a lid on wage pressures.

The US central bank on Wednesday left in place its monthly US$85 billion (S$1.05 trillion) bond-buying plan, noting that economic activity had "paused" in recent months.

Output unexpectedly contracted in the fourth quarter, largely because of a sharp slowdown in the pace of inventory accumulation and a plunge in defense spending.

The Fed has kept overnight interest rates near zero since late 2008 and it has tripled its balance sheet to about US$3 trillion through its purchases of securities, which are aimed at pushing longer-term borrowing costs lower.

Wages and salaries, which account for 70 per cent of employment costs, increased 0.3 per cent in the fourth quarter after a similar gain in the prior quarter. They were up 1.7 per cent in the 12 months through December, up from 1.4 per cent in the same period in 2011.

Benefits rose 0.6 per cent in the last three months of last year after advancing 0.8 per cent in the third quarter. Benefit costs increased 2.5 per cent in the 12 months through December, slowing from 3.2 per cent in the period through December 2011.