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Underlying US inflation picks up to keep Fed hike on track

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A key measure of US inflation picked up as expected in November on rising costs for housing, medical care and used cars, reinforcing expectations that the Federal Reserve will raise interest rates next week.

[WASHINGTON] A key measure of US inflation picked up as expected in November on rising costs for housing, medical care and used cars, reinforcing expectations that the Federal Reserve will raise interest rates next week.

The so-called core consumer price index, which excludes volatile food and energy costs, rose 0.2 per cent from the prior month and 2.2 per cent from a year earlier, according to a Labour Department report Wednesday. That matched the median estimates in a Bloomberg survey of economists. The broader CPI was unchanged from the prior month, also in line with projections, as energy prices plunged.

The report indicates underlying inflation is steadying around the Fed’s 2 per cent goal, without flaring up, as prices get support from the recent pickup in wages as well as higher materials costs amid the tariff war with China. Still, investors and economists are divided about the path of interest rates beyond a widely projected hike at the central bank’s Dec 18-19 meeting.

November figures for the Fed’s preferred gauge of inflation, a separate measure related to consumption, will be released on Dec 21. The Fed-preferred index and its core gauge tend to run slightly below the Labour Department’s CPI measures.

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The annual core CPI increase was higher than the 2.1 per cent reported for October, though overall CPI inflation slowed to 2.2 per cent from 2.5 per cent. The broader cooling reflected a 2.2 per cent monthly drop in energy prices, including a 4.2 per cent decline in gasoline, both the biggest decreases since March. 

Fed officials have increasingly emphasized they’ll depend on incoming economic data to guide policy. Fed Vice Chairman Richard Clarida recently said it’s “important to monitor measures of inflation expectations to confirm that households and businesses expect price stability to be maintained.”

A couple of items had a relatively outsize impact on the core CPI: Used-car prices rose 2.4 per cent from October, the second straight big increase, amid volatility partly resulting from a change in methodology. Much of that was offset by a 2.2 per cent drop in prices for wireless phone services, the largest decline since March 2017.

New car prices remained relatively tame: They were unchanged from October, the fourth straight month without an increase.

A separate report released Wednesday by the Labour Department showed average hourly earnings adjusted for inflation rose 0.8 per cent from November 2017. Wage gains have gradually picked up amid a tight job market, while muted inflation overall may have brought some respite to consumers.

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

BLOOMBERG