U.S. business productivity (search) at the start of the year was a bit stronger than first thought, the government said on Thursday, but labor costs of production rose at a swift 3.3 percent annual rate, well ahead of market expectations.

The Labor Department (search) said business productivity increased at a 2.9 percent pace in the first quarter, an upward revision from an initially reported 2.6 percent gain.

But sharp upward revisions to worker compensation measures led to large upward adjustments to unit labor costs (search), a key inflation pressure gauge that measures labor costs for any given unit of production.

The 3.3 percent rise in first-quarter unit labor costs followed an even faster 7.7 percent clip in the fourth quarter, the biggest gain since the first quarter of 2000. The fourth-quarter increase had initially been reported as a much milder advance of 1.7 percent.

Wall Street economists had expected first-quarter productivity growth to be revised up to a 3 percent pace from the initially reported 2.6 percent rise, but with unit labor costs marked down to a 2 percent advance from a 2.2 percent increase.

Some analysts, however, had been expecting sharp upward revisions to unit labor cost measures for both the first quarter of this year and the fourth quarter of 2004 due to recent revisions to government data on wage and salaries.

The department said unit labor costs have risen 4.3 percent over the year ended in the first quarter, the largest increase since the period ended in the third quarter of 2000.

The report implied greater inflation pressure stemming from the labor market than many economists had thought, with unit labor costs running ahead of core inflation measures.

"Historically, such a gap has typically resulted in a significant acceleration in (the Fed's preferred core inflation measure) over the following year," Goldman Sachs economist Jan Hatzius wrote in analysis on Tuesday. "Presumably, this relationship has not gone unnoticed among Fed officials."