The December increase in consumer prices followed a sharper 0.4 per cent increase in November, the Labor Department reported Friday. The December gain was the smallest advance since October.
Over the past 12 months, overall inflation is up 2.1 per cent while core inflation, which excludes volatile food and energy costs, rose 1.8 per cent. The overall 2.1 per cent price increase was identical to the inflation gain in 2016 with both years up from tiny increases of 0.8 per cent in 2014 and 0.7 per cent in 2015.
Low inflation has made the Federal Reserve cautious about raising interest rates too quickly.
After maintaining a benchmark policy rate at a record low near zero for seven years, the Fed started gradually raising rates in December 2015 with one quarter-point hike, and another in 2016. The Fed last year accelerated that pace, raising rates three times and signalling at its meeting last month that it expected to raise rates at the same clip this year.
However, economists believe the central bank may be forced to accelerate that pace if there are hints that inflation is beginning to rise more rapidly, given that unemployment continues to hover at 17-year lows.
Paul Ashworth, chief U.S. economist at Capital Economics, said that the December report, with a 0.3 per cent rise in core prices, the largest in 11 months, bolstered his view that the Fed will accelerate rate increases this year. He said he expected the next rate hike to occur in March with a total of four hikes this year. He said this forecast was based on a view that inflation will begin to show bigger gains in coming months.
“Once spring comes around … the big declines in components like wireless telephone services will drop out of the annual calculation and the core inflation rate will rebound well above 2 per cent,” Ashworth said.
For December, energy prices fell 1.2 per cent after surging 3.9 per cent in November. The December decline was led by a 2.7 per cent drop in the price of gasoline, which had jumped 7.3 per cent in November. Currently, the nationwide average for gas is $2.52, up from $2.35 a year ago, according to AAA. The government figures show that gas prices are up 6.9 per cent from December 2016.
Food costs edged up 0.2 per cent in December and are up a modest 1.6 per cent over the past year.
Core inflation rose 0.3 per cent in December with core prices up 1.8 per cent over the past 12 months. Clothing costs are one key sector bucking the trend of higher prices. Clothing costs have fallen the past four months are down 1.6 per cent over the past year.
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