Rising inflation, retail sales pave way for Fed rate hike

The commerce department said retail sales rose 0.4 per cent.

Underlying US consumer prices recorded their largest increase in 11 months in December amid strong gains in the cost of rental accommodation and healthcare, bolstering expectations that inflation will accelerate this year.
The strengthening domestic demand was also underscored by other data on Friday showing retail sales increasing at a solid clip in December. The reports likely keep the Federal Reserve on course to raise interest rates at least three times this year. The US central bank hiked borrowing costs three times in 2017. The Labour Department said its Consumer Price Index excluding the volatile food and energy components rose 0.3 per cent last month also as prices for new motor vehicles, used cars and trucks and motor vehicle insurance increased.
That was the biggest advance in the so-called core CPI since January and followed a 0.1 per cent gain in November. Core CPI increased 1.8 per cent in the 12 months through December, picking up from 1.7 per cent in November.
Economists polled by Reuters had forecast core CPI rising 0.2 per cent month-on-month and holding steady at 1.7 per cent on an annual basis. Weak import and producer price reports this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI data.
Economists are hoping that a tightening labour market, rising commodity prices and a weak dollar will lift inflation towards the Fed's two per cent target this year. The Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, has undershot its target since May 2012.
The dollar trimmed losses against a basket of currencies after the data. Prices for US Treasuries fell, with the yield on the interest-rate sensitive two-year note rising to the highest since 2008. US stock index futures pared gains.
Supporting the rise in underlying inflation pressures last month, rents increased 0.4 per cent. Owners' equivalent rent of primary residence climbed 0.3 per cent after gaining 0.2 per cent in November.
The cost of medical care increased 0.3 per cent, with prices for prescription medication surging one per cent after rising 0.6 per cent in November. The cost of both hospital and doctor visits increased 0.3 per cent.
Households also paid more for new motor vehicles, which rose 0.6 per cent in price last month, the biggest gain since January. The cost of motor vehicle insurance increased 0.6 per cent. Apparel prices, however, fell 0.5 per cent.
Cheaper gasoline prices limited the increase in the overall CPI to 0.1 per cent in December after climbing 0.4 per cent in November. That lowered the year-on-year increase in the CPI to 2.1 per cent from 2.2 per cent in November.
Last month, gasoline prices fell 2.7 per cent after rebounding 7.3 per cent in November. Food prices rose 0.2 per cent after being unchanged for two straight months.
In a separate report on Friday, the Commerce Department said retail sales rose 0.4 per cent last month. Data for November was revised to show sales gaining 0.9 per cent instead of the previously reported 0.8 per cent increase. Retail sales rose 5.4 per cent from a year ago.
Sales last month were supported by a 1.2 per cent jump in receipts at gardening and building material stores. Sales at auto dealerships rose 0.2 per cent.
Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.3 per cent last month after an upwardly revised 1.4 per cent surge in November. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have increased 0.8 per cent in November.
Last month's increase in retail sales and the sharp upward revision to November data bolsters economists' expectations of an acceleration in consumer spending in the fourth quarter. Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 2.2 per cent annualised rate in the third quarter.
The economy grew at a 3.2 per cent pace during that period.