WASHINGTON Consumer prices, excluding volatile food and energy costs, rose at the quickest pace in 15 months in January, suggesting a long period of slowing inflation had run its course.
The core Consumer Price Index increased 0.2 percent after a 0.1 percent rise in December, the Labor Department said on Thursday. It was the largest increase since October 2009.
Economists largely agreed inflation had bottomed, but said the turnaround in prices was unlikely to be so swift as to trouble policymakers at the Federal Reserve, who are still pumping money into the economy.
"Inflation has bottomed out, that's actually what the Fed would like to see happen and these numbers are by no means alarming," said Stuart Hoffman, chief economist at PNC Financial in Pittsburgh.
"The question is, if inflation is coming back, how fast and how far? This data tells me it's not coming back quickly."
Policymakers are divided about the Fed's next move. Chicago Fed President Charles Evans said on Thursday he saw little inflationary pressure until the U.S. unemployment rate drops significantly.
But his counterpart at the Dallas Fed, Richard Fisher, warned of upward pressures on prices and said he would not support any further stimulus after the Fed's $600 billion bond-buying program expires in June.
"I cannot foresee any circumstance at present that would lead me to support any further expansion of our initiative on that front," said Fisher.
The increase in core prices in January, which was a touch above economists' expectations for a 0.1 percent gain, was driven by a 1 percent surge in the cost of apparel and a 2.2 percent jump in airline fares. Shelter costs, which account for 40 percent of core CPI, rose for a fourth straight month.
The outlook for soft inflation was supported by a rise in applications for unemployment benefits last week, which suggested the labor market recovery would remain gradual, restricting wage growth.
The Labor Department said hourly earnings adjusted for inflation fell 0.1 percent in January, a third straight drop.
Other data on Thursday, however, showed the economic recovery continues to strengthen.
A measure of factory activity in the U.S. Mid-Atlantic region rose in February to its highest level since January 2004, with an employment subindex reaching its highest point since April 1973. A separate gauge of the country's economic health rose marginally in January.
INFLATION STILL TAME
Investors perceived the inflation report as tame. The data, coupled with rising tensions in the Middle East that led investors to seek safe-haven assets, pushed up prices for U.S. government debt. U.S. stock indexes held near multiyear highs, but the dollar fell broadly.
Overall consumer prices rose 0.4 percent after increasing by the same margin in December, with food and energy accounting for more than two-thirds of the increase. Economists had expected the headline CPI to rise 0.3 percent last month.
The modest increase in U.S. consumer prices stands in stark contrast to other economies, where surging commodity costs have put central banks on inflation alert.
In China, authorities are considering a range of measures to tame rising prices. Food inflation has also been cited as a factor in the political unrest in the Middle East.
Officials from the Group of 20 leading economies were expected to tackle the subject at a meeting on Friday and Saturday in Paris.
In the eyes of the Fed, inflation in the United States remains too low. Minutes of the U.S. central bank's January policy meeting released on Wednesday showed officials expected inflation to stay subdued.
In the 12 months to January, core inflation rose 1.0 percent -- a pick-up from December's 0.8 percent gain, but well below the Fed's comfort level of 2 percent or slightly under.
WHOLESALE INFLATION RISING
Data on Wednesday showed a build-up in wholesale inflation pressures, with core producer prices rising at their fastest pace in more than two years in January.
Bubbling inflation pressures at the production level were also highlighted in the report on Mid-Atlantic manufacturing from the Philadelphia Fed. The prices paid subindex in February rose to its highest level since July 2008.
But economists predicted producers would continued to have a tough time trying to pass higher costs off to consumers.
"The soft jobs market and a broad lack of wage pressures are helping to constrain core inflation. It's unlikely that inflation moves to an uncomfortable level without a much tighter jobs market," said Jim Baird, a partner at Plante Moran Financial Advisors in Kalamazoo, Michigan.
In a separate report, the Labor Department said initial claims for unemployment benefits increased 25,000 to 410,000 last week, partially reversing a hefty drop the prior week.
The claims data covers the survey period for part of the government's employment report for February, but economists discounted the latest rise as severe winter weather in recent weeks has injected a lot of volatility into the data.
"As the impact of the weather completely clears from the numbers we expect a further sustained decline in claims," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
"This will have to be captured in better payroll numbers, and we do not expect to have to wait very long to see it."