US core consumer prices post largest gain in 4-1/2 years

[WASHINGTON] Rising rents and medical costs lifted underlying US inflation in January by the most in nearly 4-1/2 years, signs of an uptick in price pressures that could allow the Federal Reserve to gradually raise interest rates this year.

The Labour Department said on Friday its Consumer Price Index, excluding the volatile food and energy components, increased 0.3 per cent last month. That was the biggest gain since August 2011 and followed a 0.2 per cent rise in December.

In the 12 months through January, the core CPI advanced 2.2 per cent, the largest rise since June 2012. The CPI had increased 2.1 per cent in December. The Fed has a 2 per cent inflation target and monitors a price measure that is running well below the core CPI.

Economists polled by Reuters had forecast core CPI up 0.2 per cent last month and increasing 2.1 per cent from a year ago.

Inflation is being watched for clues on whether the Fed would continue raising interest rates this year after the US central bank lifted borrowing costs in December for the first time in nearly a decade.

Tighter financial market conditions in the wake of a recent sharp stock market sell-off and slowing domestic and global growth have almost wiped out bets for a March rate increase.

Signs of a pick-up in underlying inflation are likely to be welcomed by Federal Reserve officials, but significant gains remain a challenge against the backdrop of very low inflation expectations by households.

Still, the firming in the core CPI, together with a strengthening labour market suggest rate hikes for the rest of the year remain on the table.

The overall CPI was unchanged last month after slipping 0.1 per cent in December. The CPI increased 1.4 per cent in the 12 months through January, the biggest rise since October 2014, after gaining 0.7 per cent in December.

The year-over-year inflation rate is rising as the oil price-driven weak readings in 2015 wash out of the calculation.

The government on Wednesday published revisions to the inflation data going back five years. Those revisions showed both the monthly CPI and core CPI readings a bit firmer in the last months of 2015 than previously reported.

Last month, the rental index increased 0.3 per cent after a similar gain in December. Medical care costs rose 0.5 per cent, with prices for prescription drugs also increasing 0.5 per cent. The cost of doctor visits edged up 0.1 per cent after falling 0.2 per cent in December. Hospital costs increased 0.4 per cent.

Apparel prices rose 0.6 per cent after falling for four straight months. The increase in apparel is surprising as retailers have been offering deep discounts to sell unwanted inventory. Prices for new motor vehicles advanced 0.3 per cent.

Gasoline prices fell 4.8 per cent, while food prices were unchanged.

REUTERS