Steadily firming U.S. inflation supports Fed rate hike

Tue Dec 15, 2015 1:37pm EST
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By Lucia Mutikani

WASHINGTON (Reuters) - Underlying U.S. inflation pressures rose in November, which could give the Federal Reserve more confidence to raise interest rates on Wednesday, even as renewed weakness in gasoline prices kept overall consumer prices in check.

The Labor Department said on Tuesday its so-called core Consumer Price Index, which excludes food and energy, gained 0.2 percent last month. It was the third straight month that the core CPI increased by that margin, and reflected rising rents, airline fares, new motor vehicles and healthcare costs.

In the 12 months through November, the core CPI rose 2.0 percent, the largest gain since May 2014, after being up 1.9 percent in October. The Fed targets 2 percent inflation and it tracks an index that is running far below the core CPI.

Fed officials started a two-day policy meeting on Tuesday. The U.S. central bank is expected to lift its benchmark overnight interest rate from near zero at the end of the meeting on Wednesday, encouraged by a strengthening labor market. The Fed has not raised interest rates since June 2006.

"This report should shore up the Fed's confidence in the inflation outlook as the firming in domestic prices will likely serve as a confidence booster in their expectation for inflation to move back towards target in a timely manner," said Millan Mulraine, deputy chief economist at TD Securities in New York.

There is optimism that tightening labor market conditions, characterized by a jobless rate now in a range that some Fed

officials view as consistent with full employment, and strong domestic demand will put upward pressure on wages and drive inflation toward its target.

Inflation is also seen heading higher in 2016 as the effects of last year's sharp drop in oil prices fade. The dollar's pace of appreciation is also expected to slow, which could ease some of the pressure on commodity prices.   Continued...

A woman shops for groceries at a Whole Foods supermarket in New York May 18, 2010. REUTERS/Shannon Stapleton