Steadily firming U.S. inflation supports Fed rate hike

WASHINGTON (Reuters) - Underlying U.S. inflation pressures rose in November, which could give the Federal Reserve more confidence to raise interest rates on Wednesday, even as renewed weakness in gasoline prices kept overall consumer prices in check.

A woman shops for groceries at a Whole Foods supermarket in New York May 18, 2010. REUTERS/Shannon Stapleton

The Labor Department said on Tuesday its so-called core Consumer Price Index, which excludes food and energy, gained 0.2 percent last month. It was the third straight month that the core CPI increased by that margin, and reflected rising rents, airline fares, new motor vehicles and healthcare costs.

In the 12 months through November, the core CPI rose 2.0 percent, the largest gain since May 2014, after being up 1.9 percent in October. The Fed targets 2 percent inflation and it tracks an index that is running far below the core CPI.

Fed officials started a two-day policy meeting on Tuesday. The U.S. central bank is expected to lift its benchmark overnight interest rate from near zero at the end of the meeting on Wednesday, encouraged by a strengthening labor market. The Fed has not raised interest rates since June 2006.

“This report should shore up the Fed’s confidence in the inflation outlook as the firming in domestic prices will likely serve as a confidence booster in their expectation for inflation to move back towards target in a timely manner,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

There is optimism that tightening labor market conditions, characterized by a jobless rate now in a range that some Fed

officials view as consistent with full employment, and strong domestic demand will put upward pressure on wages and drive inflation toward its target.

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Inflation is also seen heading higher in 2016 as the effects of last year’s sharp drop in oil prices fade. The dollar’s pace of appreciation is also expected to slow, which could ease some of the pressure on commodity prices.

Signs of firming inflation pressures and a rebound in crude oil prices from near 11-year lows weighed on U.S. Treasury debt prices. The dollar firmed against a basket of currencies .DXY and U.S. stocks were track for their second day of gains. [US/N] [FRX/] [.N]


Other data on Tuesday showed factory activity in New York state contracted for a fifth straight month in December as the sector continues to reel from dollar strength and ongoing efforts by businesses to reduce an inventory bloat.

Homebuilder confidence dipped in December, but remained at levels consistent with a gradual housing market recovery.

“Housing market activity continues to improve at a moderate pace,” said Jesse Hurwitz, an economist at Barclays in New York.

Last month’s increase in the core CPI was offset by falling gasoline prices, leaving the overall CPI unchanged after a 0.2 percent increase in October. But in the 12 months through November, the CPI increased 0.5 percent, the largest gain since last December.

Energy prices fell 1.3 percent, with gasoline prices dropping 2.4 percent after rising 0.4 percent in October. The cost of electricity, however, increased 0.3 percent. Food prices dipped 0.1 percent, reversing the prior month’s gain.

Within the core CPI, rents increased 0.2 percent after rising 0.3 percent in October. They were up 3.6 percent in the 12 months through November, reflecting rising demand for rental accommodation as more Americans shun home ownership.

Healthcare costs increased broadly, with doctor visits rising 1.1 percent. Apparel prices fell for a third straight month, while airline fares increased 1.2 percent. There were also increases in the cost of tobacco, education, communication and motor vehicle insurance.

“We think that the underlying strength of the domestic economy will continue to allow inflation rates to grind higher,” said Harm Bandholz, chief economist at UniCredit Research in New York.

Reporting by Lucia Mutikani; Editing by Andrea Ricci, Frances Kerry and James Dalgleish