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Consumer prices increase by most in over a year

CPI rises 0.4% in May; builders break ground on one million homes

[WASHINGTON] The cost of living in the United States rose more than forecast in May, reflecting broad-based gains that signal inflation will move closer to the Federal Reserve's goal.

The consumer price index (CPI) increased 0.4 per cent, the biggest advance since February 2013, after climbing 0.3 per cent the prior month, a Labour Department report showed yesterday in Washington.

The median forecast of 81 economists surveyed by Bloomberg called for a 0.2 per cent increase. Excluding volatile food and energy prices, the gain was the largest in almost three years.

A pick-up in inflation lessens the threat of a prolonged drop in prices that hurts economic growth, giving Fed officials reason to continue to scale back their unprecedented bond-buying programme. Continued hiring and faster wage gains will be needed to boost demand and enable consumers to cope with higher prices.

"We expect inflation continuing to rise gradually," Neil Dutta, head of US economics at Renaissance Macro Research LLC in New York, said in a research note. "By year's end, we suspect the Fed will acknowledge a neutral set of risks around the inflation outlook." Last month's increase in consumer prices exceeded all forecasts in the Bloomberg survey, which ranged from no change to a 0.3 per cent advance.

Costs rose 2.1 per cent over the past 12 months, the most since October 2012, after a 2 per cent year-over-year gain in April.

Another report yesterday showed builders broke ground on one million homes in May, indicating the industry is picking up this quarter after a weather-induced slump to start the year.

The number of housing starts last month was in line with the median forecast of economists surveyed by Bloomberg and followed April's 1.07 million annualised rate that was the most since November, according to figures from the Commerce Department.

The Labour Department's inflation report showed that stripping out volatile food and fuel, the so-called core measure increased 0.3 per cent, the most since August 2011, and following a 0.2 per cent gain the prior month. Economists had forecast a 0.2 per cent advance, according to the survey median.

The core index increased 2 per cent from the same month in 2013 after a 1.8 per cent gain in April.

The Fed's 2 per cent goal is based on the Commerce Department's inflation gauge that is tied to consumer spending. That measure climbed 1.6 per cent in the 12 months through April, and May data are scheduled for release on June 26.

Energy costs increased 0.9 per cent from a month earlier, while food prices rose 0.5 per cent, the most since August 2011.

Fed officials led by chair Janet Yellen reiterated at their April meeting that long-term inflation expectations remain stable. The Fed's Open Market Committee was meeting yesterday and today in Washington.

In April, the Fed pared its monthly asset-buying to US$45 billion, its fourth straight US$10 billion cut, and said further reductions in "measured steps" are likely.

The CPI is the broadest of three price gauges from the Labour Department because it includes all goods and services. About 60 per cent of the index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents.

Wholesale prices decreased 0.2 per cent in May, data showed last week. Import prices rose 0.1 per cent last month following a 0.5 per cent decline in April, according to a separate report released on June 12. - Bloomberg