Medical costs push up consumer prices

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. consumer prices rose more than expected in January despite a dip in energy prices, as medical costs jumped, according to a government report on Wednesday that led financial markets to trim bets of interest rate cuts.

Consumer prices rose 0.2 percent, while core prices, which exclude food and energy costs, climbed 0.3 percent, the Labor Department said.

Analysts were expecting overall consumer prices to inch up 0.1 percent and for core prices to rise by 0.2 percent.

The higher-than-expected Consumer Price Index numbers diminished market expectations the Federal Reserve would lower interest rates more than once in 2007.

U.S. Treasury debt prices and stocks fell while the dollar rose. U.S. interest rate futures pared bets on a third-quarter rate cut by the Fed to 50 percent from 70 percent before the price report.

"This adds credibility to Fed Chairman Ben Bernanke in his monetary report to Congress last week that inflation remains a concern," said Richard DeKaser, chief economist for National City Corp. in Cleveland.

Energy costs slid 1.5 percent, partly reversing a 4.2 percent gain in December.

But medical costs rose 0.8 percent, the steepest increase since a matching 0.8 percent gain in August 1991. The rise in medical costs was responsible for 60 percent of the gain in core prices, the Labor Department said.