Underlying U.S. consumer prices recorded their largest increase in 11 months in December amid strong gains in the cost of rental accommodation and health care, bolstering expectations that inflation will gain momentum this year.
The Labor Department said its Consumer Price Index excluding the volatile food and energy components rose 0.3 percent last month also as prices for new motor vehicles, used cars and trucks and motor vehicle insurance increased.
That was the biggest advance in the so-called core CPI since January and followed a 0.1 percent gain in November. Core CPI increased 1.8 percent in the 12 months through December, picking up from 1.7 percent in November. Economists polled by Reuters had forecast core CPI rising 0.2 percent month-on-month and holding steady at 1.7 percent on an annual basis.
Weak import and producer price reports this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI data.
Economists are hoping that a tightening labor market, rising commodity prices and a weak dollar will lift inflation toward the Federal Reserve's 2 percent target this year.
Fed officials have pencilled in three rate increases this year, but several analysts see the prospect of four rises given the strength of the economy and the added short-term impetus from deficit-expanding tax cuts. Bill Dudley, the New York Fed president, said in a hawkish speech on Thursday that the Fed needed to take on board the risk of economic “overheating” as it sets policy.
He indicated that if the central bank’s Federal Open Market Committee is slow in tightening policy, it could be forced to hit the brakes, risking a recession.
Investors’ already-firm expectations rose for a Fed interest-rate increase in March, as the data could help calm an increasingly heated debate among central bank officials over why inflation has stayed relatively placid despite solid economic growth and the lowest unemployment rate since 2000. Fed policy makers have penciled in three rate hikes in 2018 following three last year.
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