Underlying U.S. consumer prices recorded their largest increase in 11 months in December amid strong gains in the cost of rental accommodation and healthcare, bolstering expectations that inflation will accelerate this year.
The strengthening domestic demand was also underscored by other data on Friday showing retail sales increasing at a solid clip in December. The reports likely keep the Federal Reserve on course to raise interest rates at least three times this year. The U.S. central bank hiked borrowing costs three times in 2017.
The Labor Department said its Consumer Price Index excluding the volatile food and energy components rose 0.3 percent last month also as prices for new motor vehicles, used cars and trucks and motor vehicle insurance increased.
That was the biggest advance in the so-called core CPI since January and followed a 0.1 percent gain in November. Core CPI increased 1.8 percent in the 12 months through December, picking up from 1.7 percent in November.
Economists polled by Reuters had forecast core CPI rising 0.2 percent month-on-month and holding steady at 1.7 percent on an annual basis.
Weak import and producer price reports this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI data.
Economists are hoping that a tightening labor market, rising commodity prices and a weak dollar will lift inflation toward the Fed’s 2 percent target this year. The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, has undershot its target since May 2012.
The dollar trimmed losses against a basket of currencies after the data. Prices for U.S. Treasuries fell, with the yield on the interest-rate sensitive two-year note rising to the highest since 2008. U.S. stock index futures pared gains.
BROAD PRICE INCREASES
Supporting the rise in underlying inflation pressures last month, rents increased 0.4 percent. Owners’ equivalent rent of primary residence climbed 0.3 percent after gaining 0.2 percent in November.
The cost of medical care increased 0.3 percent, with prices for prescription medication surging 1.0 percent after rising 0.6 percent in November. The cost of both hospital and doctor visits increased 0.3 percent.
Households also paid more for new motor vehicles, which rose 0.6 percent in price last month, the biggest gain since January. The cost of motor vehicle insurance increased 0.6 percent. Apparel prices, however, fell 0.5 percent.
Cheaper gasoline prices limited the increase in the overall CPI to 0.1 percent in December after climbing 0.4 percent in November. That lowered the year-on-year increase in the CPI to 2.1 percent from 2.2 percent in November.
Last month, gasoline prices fell 2.7 percent after rebounding 7.3 percent in November. Food prices rose 0.2 percent after being unchanged for two straight months.
In a separate report on Friday, the Commerce Department said retail sales rose 0.4 percent last month. Data for November was revised to show sales gaining 0.9 percent instead of the previously reported 0.8 percent increase. Retail sales rose 5.4 percent from a year ago.
Sales last month were supported by a 1.2 percent jump in receipts at gardening and building material stores. Sales at auto dealerships rose 0.2 percent. Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.3 percent last month after an upwardly revised 1.4 percent surge in November. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have increased 0.8 percent in November. Last month’s increase in retail sales and the sharp upward revision to November data bolsters economists’ expectations of an acceleration in consumer spending in the fourth quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 percent annualized rate in the third quarter. The economy grew at a 3.2 percent pace during that period.