US data points to firming economy, inflation
Underlying U.S. inflation increased more than expected in February as rents and medical costs maintained their upward trend, which could keep the Federal Reserve on course to gradually raise interest rates this year.
Other data on Wednesday showed the housing market continuing to strengthen last month and manufacturing stabilizing. The Fed kept interest rates unchanged on Wednesday, but acknowledged that inflation "picked up in recent months." New projections from the U.S. central bank showed policymakers expected two quarter-point rate increases by year-end, half the number seen in December. The combination of stirring inflation, a steady housing sector and tightening labor market have raised the probability of a rate hike in June.
"It looks like the Fed remains really cautious, they are not prepared to move before June at the earliest. Today's numbers, especially the inflation report, is a warning that the days of no price pressures are behind us," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. The Labor Department said its Consumer Price Index, excluding the volatile food and energy components, rose 0.3 percent last month after a similar gain in January.
That lifted the so-called core CPI 2.3 percent in the 12 months through February, the largest increase since May 2012, after it advanced 2.2 percent in January. Economists polled by Reuters had forecast the core CPI rising 0.2 percent last month and increasing 2.2 percent from a year ago.
The Fed has a 2 percent inflation target and monitors a price measure that has also pushed higher in recent months. The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade. Fed Chair Janet Yellen told reporters temporary factors were likely behind the recent run-up in prices, adding that policymakers expected a gradual rise in inflation.
"I want to warn that there may be some transitory factors that are influencing that. So I'm wary and haven't yet concluded that we have seen any significant uptick that will be lasting in, for example, in core inflation," said Yellen. The dollar fell to a one- month low against a basket of currencies, while prices for U.S. Treasury debt gained. U.S. stocks rose, with homebuilding shares such as D.R. Horton Inc (DHI.N) and Lennar Corp (LEN.N) also getting a boost from the better housing data.
In a separate report, the Commerce Department said housing starts increased 5.2 percent to a seasonally adjusted annual pace of 1.18 million units last month, the highest level in five months.
Groundbreaking activity had been held back by adverse weather. While the rebound in housing starts offered a lift to first-quarter gross domestic product growth estimates, that was offset by a drop in utilities output as temperatures warmed up in February. First-quarter growth is forecast around a 2 percent annual rate, an acceleration from the 1.0 percent rate logged in the final three months of 2015.
In a third report, the Fed said industrial production declined 0.5 percent as mining and utilities tumbled. Industrial production rose 0.8 percent in January. But manufacturing output increased 0.2 percent last month after spiking 0.5 percent in January.