U.S. prices see largest increase in 2½ years

Consumers paid more for gas, rental housing

WASHINGTON • U.S. consumer prices increased in December as households paid more for gasoline and rental accommodation, leading to the largest year-on-year increase in 21/2 years and signalling that inflation pressures could be building.

The inflation rise, coming as economic growth strengthens, was corroborated by a separate report on Wednesday from the Federal Reserve, which said pricing pressures “intensified” somewhat from late November through the end of the year.

The trend, if sustained, may push the U.S. central bank to raise interest rates at a faster pace than currently anticipated. The Fed has forecast three rate hikes this year. It raised its benchmark overnight interest rate by 25 basis points to a range of 0.50 per cent to 0.75 per cent last month.

“Further momentum in consumer prices could add to the perception of a more hawkish Fed and the potential for more aggressive tightening,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

The Labor Department said its Consumer Price Index rose 0.3 per cent last month after a 0.2 per cent gain in November. In the 12 months through December, the CPI increased 2.1 per cent, the biggest year-on-year rise since June 2014. The CPI rose 1.7 per cent in the year to November.

The gains were in line with economists’ expectations. The CPI increased 2.1 per cent in 2016, up from a gain of 0.7 per cent in 2015.

The dollar rebounded from a near six-week low against a basket of currencies on the inflation data. Prices for U.S. Treasuries fell, with the yield on the 30-year bond rising to almost 3 per cent. U.S. stocks were little changed.

The so-called core CPI, which strips out food and energy costs, rose 0.2 per cent last month after the same increase in November. As a result, the core CPI was up 2.2 per cent in the 12 months through December, from 2.1 per cent in November.

The Fed has a two per cent inflation target and tracks an inflation measure which is currently at 1.6 per cent. Rising wages due to a tightening labour market also are contributing to higher inflation.

Average hourly earnings increased in December at their quickest pace since June 2009, a government report showed earlier this month.

“There is nothing here to dissuade the Fed from picking up its rate hike pace this year,” said Michael Gregory, deputy chief economist at BMO Capital Markets in Toronto. Higher gasoline prices helped push up the Consumer Price Index in the U.S. 2.1 per cent year-over-year.