Rising rents and healthcare costs lifted underlying U.S. inflation in January by the most in nearly 4-1/2 years, signs of a pick-up in price pressures that could allow the Federal Reserve to gradually raise interest rates this year.
The Labor Department said on Friday its Consumer Price Index, excluding the volatile food and energy components, increased 0.3 percent last month. That was the biggest gain since August 2011 and followed a 0.2 percent rise in December.
“It is a policymaker’s dream come true, they wanted more inflation and they got it. The stronger inflation report puts a rate hike back on the table at the March meeting,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.
Tighter financial market conditions in the wake of a recent sharp stock market sell-off and slowing domestic and global growth have wiped out bets for a rate increase at the U.S. central bank’s March 15-16 policy meeting. Markets also see the probabilities of an increase in borrowing costs for the rest of the year as slim.
The Fed lifted its benchmark overnight interest rate from near zero in December, the first rate hike in nearly a decade.
While Fed officials have worried about inflation being too low, they have also maintained that the factors holding back inflation are transitory.
Still, significant gains remain a challenge against the backdrop of very low inflation expectations by households, renewed weakness in oil prices and a buoyant dollar.
The firming in the core CPI, together with a strengthening labor market suggest further monetary policy tightening this year cannot be ruled out.
U.S. stocks were trading lower on the data and weaker oil prices. The dollar slipped against a basket of currencies and prices for U.S. Treasury debt were mostly softer.
In the 12 months through January, the core CPI advanced 2.2 percent, the largest rise since June 2012 and exceeded the 1.9 percent average annualized increase over the last 10 years.
The core CPI was up 2.1 percent in December from the year earlier. The Fed has a 2 percent inflation target and monitors a price measure that is running well below the core CPI.