Weak U.S. inflation, housing data lower March rate hike chances

Wed Jan 20, 2016 4:24pm EST
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By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices unexpectedly fell in December as the cost of energy products and food declined, offering signs of weak inflation that further diminish expectations of a Federal Reserve interest rate hike in March.

Other data on Wednesday showed a drop in housing starts and building permits last month, adding to weak reports on retail sales, industrial production, exports, inventory and manufacturing surveys that have suggested a significant slowdown in economic growth at the end of 2015.

Against the backdrop of renewed weakness in oil prices, which touched new lows on Wednesday, economists say the expected reversion to the Fed's 2 percent inflation target is slowing.

The Labor Department said its Consumer Price Index slipped 0.1 percent after being unchanged in November. The CPI was also weighed down by moderate increases in rents and healthcare costs.

"The broad-based nature of the decline in inflation will hardly be encouraging news at the Fed, and if anything it is likely to temper their confidence in the outlook for inflation," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Despite last month's drop, the CPI rose 0.7 percent in the 12 months through December, the biggest gain in a year. That followed a 0.5 percent increase in November. Economists had forecast the CPI unchanged in December and rising 0.8 percent from a year ago.

The year-over-year inflation rate is rising as oil price-driven weak readings in 2015 drop out of the calculation. The boost from the so-called base effects could, however, be limited by lower oil prices, which are near 12-year lows.

Consumer prices increased 0.7 percent in 2015, the second smallest December-December gain in the last 50 years, after rising 0.8 percent in 2014.   Continued...

A shopper walks down an aisle in a newly opened Walmart Neighborhood Market in Chicago in this September 21, 2011 file photo. REUTERS/Jim Young/Files