Higher gasoline, rental costs boost US consumer inflation

WASHINGTON: US consumer prices increased in December as households paid more for gasoline and rental accommodation, leading to the largest year-onyear increase in 2-1/2 years and signaling that inflation pressures could be building.

The rise in inflation, 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 2016.

The trend, if sustained, may push the US central bank to raise interest rates at a faster pace than currently anticipated. The Fed has forecast three rate hikes this year.

“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 Fed 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.

Fed Chair Janet Yellen suggested on Wednesday that she supported further rate increases.

“Waiting too long ... could risk a nasty surprise down the road - either too much inflation, financial instability, or both,” Yellen said in remarks prepared for delivery to the Commonwealth Club of California in San Francisco.

The dollar rebounded from a near six-week low against a basket of currencies on Yellen’s comments and the inflation data. Prices for US Treasuries fell, with the yield on the 30-year bond rising to 3 per cent. US stocks ended mostly higher.

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 2 per cent inflation target and tracks an inflation measure which is currently at 1.6 per cent. Rising wages due to a tightening labor 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.

The Fed’s latest Beige Book, a collection of anecdotal information from businesses, showed eight of the central bank’s 12 districts reported modest price increases from late November through the end of December.

“Pricing pressures intensified somewhat since the last report,” the Fed said. “Increases in input costs were more widespread than increases in final goods prices. Businesses in several districts reportedly expect further modest increases in input costs and selling prices in 2017.”

Inflation could also get a boost from an expected fiscal stimulus from the incoming Trump administration.

Donald Trump, who will be sworn in as US president on Friday, has pledged to increase infrastructure spending and cut taxes.

“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. — Reuters