WASHINGTON (Reuters) - A rise in the barometer of consumer prices most familiar to Americans has failed to show up in an inflation measure closely watched by the Federal Reserve, making it unlikely the central bank will raise interest rates next month.
The Labor Department said on Friday its Consumer Price Index (CPI) rose 2.2 percent in January from a year earlier when factoring out food and energy.
This "core" reading has been accelerating since the end of 2014 but the Fed puts more emphasis on a separate core inflation reading produced by the Commerce Department that policymakers feel is more accurate.
The Commerce Department's Personal Consumption Expenditures (PCE) index shows inflation didn't budge last year and December's 1.4 percent reading, the latest available, was well below the Fed's 2 percent target. This has kept the Fed's rate-setting committee, known as the FOMC, on edge.
Friday's data "should provide some relief, though it is unlikely to change the current policy bias to stay on the sideline at the March FOMC meeting," said Millan Mulraine, an economist at TD Securities in New York.
Fed policymakers put special emphasis on core inflation because stripping out volatile food and energy prices arguably gives a better view of where inflation is heading.
Even so, officials are unsure how much a strong dollar is depressing core prices by lowering the cost of imports and policymakers are increasingly divided about the inflation outlook.
Cleveland Fed President Loretta Mester, who has backed rate hikes for longer than most Fed policymakers, said on Friday that inflation appears on track to rise to 2 percent. But another long-time hawk on rate policy, St. Louis Fed President James Bullard, said two days earlier it was unwise to lift borrowing costs further.
The Fed lifted rates in December for the first time in a decade and indicated at the time four more hikes were likely in 2016. Investors expect fewer if any hikes this year and the minutes of the Fed's January 26-27 meeting said officials discussed changing their outlook for the path of policy.
Economists generally see the PCE index as more accurate than the CPI index because it more quickly accounts for shifts in consumer spending toward different products and services.
The PCE index also weights spending categories differently, giving slightly less importance to housing costs like rising rents which have pushed the CPI index higher.
Economists expect the PCE index to eventually follow the CPI higher if the global slowdown doesn't deal a heavier blow to the U.S. economy.
"The chances of a Fed rate hike in March remain slim but we still think that the Fed will raise interest rates in June as fears of recession in China and the U.S. ... subside," said Steve Murphy, an economist with Capital Economics in Toronto.
Reporting by Jason Lange; Editing by Andrea Ricci