WASHINGTON U.S. consumer prices recorded their biggest increase in more than three years in April as gasoline and rents rose, pointing to a steady inflation build-up that could give the Federal Reserve ammunition to raise interest rates later this year.
Other data on Tuesday showed housing starts and industrial production rebounded strongly last month, suggesting the economy was regaining steam early in the second quarter after almost stalling early in the year.
"The combination of higher prices, housing gains and industrial production support the narrative of a second-quarter rebound in GDP, and will stir talks of the necessity of at least one Fed hike later this year," said Jay Morelock, an economist at FTN Financial in New York.
The Labor Department said its Consumer Price Index increased 0.4 percent last month, the largest gain since February 2013, after rising 0.1 percent in March. That took the year-on-year increase in the CPI to 1.1 percent from 0.9 percent in March.
Americans also paid more for medical care, food, recreation, tobacco, motor vehicle insurance, airline fares and grooming. Economists polled by Reuters had forecast the CPI gaining 0.3 percent last month and advancing 1.1 percent from a year ago.
The so-called core CPI, which strips out food and energy costs, rose 0.2 percent after climbing 0.1 percent in March. In the 12 months through April, the core CPI increased 2.1 percent after increasing 2.2 percent in March.
The Fed has a 2 percent inflation target and tracks an inflation measure which is currently at 1.6 percent. The rise in prices in April is likely to be welcomed by Fed officials who have persistently expressed concerns about inflation running below its target.
"Inflation pressures are picking up, I don't think there is any need for the Fed to panic. They don't need to hit their inflation target and declare victory," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania."
"They need to allow inflation to run hot for a little bit."
The dollar initially rose against a basket of currencies after the data, but gave up gains and was trading lower. U.S stocks fell, while prices for longer-dated U.S. government bonds rose.
GROWTH PICKING UP
Financial markets have almost priced out a rate hike before September, given sluggish growth at the beginning of the year. The U.S. central bank lifted its benchmark overnight interest rate in December for the first time in nearly a decade and policymakers have forecast two more increases this year.
The are signs, however, the economy got off to a strong start in the second quarter.
In a separate report, the Commerce Department said housing starts increased 6.6 percent to a seasonally adjusted annual pace of 1.17 million units last month, with builders ramping up the construction of single- and multi-family homes. Building permits rose 3.6 percent to a 1.12 million-unit rate.
The improving outlook was underscored by a third report from the Fed showing industrial production increased 0.7 percent in April after two straight months of declines as a 5.8 percent surge in utilities output offset another decline in mining.
Manufacturing production rose 0.3 percent, with machinery and motor vehicles and parts output increasing solidly.
Mining output fell 2.3 percent as it continues to be undermined by the delayed pass-through of the oil price plunge between June 2014 and December 2015, which has caused a sharp reduction in capital spending by energy firms.
Mining output has decreased more than 1-1/2 percent per month, on average, over the past eight months.
While Tuesday's data added to strong retail sales numbers in suggesting that economic growth regained steam early in the second quarter, a slowdown in payrolls gains last month and a recent spike in new applications for unemployment benefits have raised some concerns about the labor market's health.
The inflation report showed gasoline prices jumped 8.1 percent last month, the largest gain since August 2012, adding to March's 2.2 percent increase. Food prices rose 0.2 percent after falling 0.2 percent in March.
Within the core CPI basket, owners' equivalent rent of primary residence rose 0.3 percent after increasing 0.2 percent in March. Medical care costs increased 0.3 percent after gaining 0.1 percent in March. Prescription drugs shot up 0.7 percent and the cost of hospital services increased 0.3 percent.
But apparel prices fell for a second straight month as did the cost of used cars and trucks.
U.S. inflation (CPI interactive) tmsnrt.rs/1N6BwRs
Core inflation divergence: CPI vs. PCE tmsnrt.rs/1QoX3pE
U.S. housing starts, building permits link.reuters.com/mek83w
U.S. industrial output, capacity utilization link.reuters.com/var62w
(Reporting by Lucia Mutikani; Additional reporting by Jason Lange; Editing by Andrea Ricci)