U.S. inflation jumps, boosting likelihood of rate hike

U.S. consumer prices climbed to their fastest pace in almost a year in December, boosting the prospect of the Federal Reserve hiking interest rates as early as March.

U.S. inflation rate rose by 0.3 per cent in December from the previous month's level

Rents increased 0.4 per cent in December, new data from the Department of Labour showed Friday.

Underlying U.S. consumer prices saw their biggest jump in 11 months in December, boosting expectations that inflation will keep the Federal Reserve on the path of raising interest rates.

The Consumer Price Index (CPI), which excludes volatile food and energy components, rose 0.3 per cent last month from November, compared to expectations of a 0.2 per cent increase by a Reuters poll of economists.

That is the biggest gain for what is considered the "core" CPI since January 2017. It increased 1.8 per cent in the year to December.

"This, along with the solid retail sales report for the same month, supports our expectation for a March rate hike by the Fed," said Jennifer Lee, senior economist at BMO Capital Markets.

Retail sales rose 0.4 per cent in December from the previous month and was up 5.4 per cent from a year earlier on the back of higher costs for motor vehicles.

The U.S. central bank is forecast to hike its benchmark interest rate three times this year after making three similar hikes last year.

Friday's data prompted some economists to reiterate an even more bullish view of the Fed's monetary policy.

"It supports our view that the Fed will ultimately increase interest rates by a more aggressive 100 basis points 
cumulatively this year," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Rising prices 

The big gains in core inflation were driven by the rising cost of rental accommodation and healthcare. 

Rents increased 0.4 per cent, while the cost of medical care rose 0.3 per cent, along with the cost of prescription medicine jumping 1 per cent.

"At a very minimum, one can say that core CPI has convincingly stopped declining and is holding firm only a little beneath the Fed's 2 per cent inflation target," said Derek Holt, chief economist at Scotiabank.

"That's encouraging in its own right as it says the Fed really isn't that far off from hitting its targets," he added.

Consumer spending accounts for more than two-thirds of the U.S. economy and it increased at a 2.2 per cent annualized rate in the third quarter, when the economy grew 3.2 per cent.