US inflation pressures may be building on higher gasoline, rental costs

The numbers could push the US Fed into more aggressive tightening

PUBLISHED : Thursday, 19 January, 2017, 1:26am
UPDATED : Thursday, 19 January, 2017, 1:26am

US consumer prices rose in December as households paid more for gasoline and rental accommodation, leading to the largest year-on-year increase in 2-1/2 years and signalling that inflation pressures could be building.

Other data on Wednesday showed US industrial production recording its biggest increase in two years. Rising inflation and stronger economic growth, if sustained, may push the Federal Reserve to raise interest rates at a faster pace than currently anticipated.

“Further momentum in consumer prices could add to the perception of a more hawkish Fed and the potential for more aggressive tightening,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

The Labor Department said its Consumer Price Index rose 0.3 per cent last month after a 0.2 per cent gain in November. In the 12 months through December, the CPI increased 2.1 per cent, the biggest year-on-year rise since June 2014. The CPI rose 1.7 per cent in the year to November.

The gains were in line with economists’ expectations. The CPI increased 2.1 per cent in 2016, up from a gain of 0.7 per cent in 2015.

The dollar rose against a basket of currencies on the inflation data, while prices for US government bonds fell. US stocks were trading mostly higher.

The so-called core CPI, which strips out food and energy costs, rose 0.2 per cent last month after the same increase in November. As a result, the core CPI was up 2.2 per cent in the 12 months through December, from 2.1 per cent in November.

The Fed has a 2 per cent inflation target and tracks an inflation measure which is currently at 1.6 per cent. Rising wages due to a tightening labour market also is contributing to higher inflation.

Average hourly earnings increased in December at their quickest pace since June 2009, a government report showed earlier this month.

Price pressures are likely to remain on an upward trend amid expectations of fiscal stimulus from the incoming Trump administration. Republican businessman-turned-politician Donald Trump, who will be sworn in as US president on Friday, has pledged to increase infrastructure spending and cut taxes.

“As the labour market continues to tighten, we expect businesses, particularly in the labour-intensive service sector, to pass on a greater share of cost increases and generate higher inflation,” said Sarah House, an economist at Wells Fargo Securities in Charlotte, North Carolina.

The US central bank has forecast three rate hikes this year. It raised its benchmark overnight interest rate by 25 basis points to a range of 0.50 per cent to 0.75 per cent last month.

nderscoring the economy’s momentum, a separate report from the Fed on Wednesday showed industrial production rose 0.8 per cent in December. That was the biggest gain in industrial output since November 2014.

Output was driven by a surge in the utilities production as well as an increase in manufacturing.

“The small gain in manufacturing, the third of the past four months, is a positive sign from a sector that has moved sideways over much of the past two years,” said Andrew Labelle, an economist at Citigroup in New York. “The pickup in commodity prices is clearly providing a lift to manufacturing.”

The consumer inflation report showed gasoline prices climbed 3.0 per cent last month after advancing 2.7 per cent in November.

Housing also continued its upward march in December. Rental costs increased 0.3 perc ent last month, with owners’ equivalent rent of primary residence also rising 0.3 per cent. Rents jumped 4.0 per cent in 2016.

Consumers also paid more for healthcare last month. The cost of medical care rose 0.2 per cent as did the cost of prescription medicine, while prices paid for hospital services jumped 0.3 per cent.

There were also price increases for a range of other goods and services. The cost of motor vehicle insurance increased 0.8 per cent and airline fares rose 1.9 per cent after falling 1.3 per cent in November. Prices for used cars and trucks increased 0.5 per cent.

But households got some respite at supermarkets and department stores. Food prices were unchanged for a sixth straight month, with the cost of food consumed at home dropping for an eighth consecutive month. Apparel prices fell for a second straight month in December.