Rising Inflation, Tightening Job Market Support More Rate Hikes

WASHINGTON (Reuters) -

U.S. consumer prices moderated in November, but the underlying trend continued to point to firming inflation pressures amid rising rents, which could support more interest rate increases from the Federal Reserve next year.

The prospects of further monetary policy tightening in 2017 were also boosted by other data on Thursday showing a decline in the number of Americans filing for unemployment benefits last week. The labor market is viewed as being at or near full employment.

The Labor Department said its Consumer Price Index rose 0.2 percent last month as gasoline price increases slowed and food costs remained soft. The CPI advanced 0.4 percent in October.

In the 12 months through November, the CPI increased 1.7 percent, the biggest year-on-year gain since October 2014. The CPI rose 1.6 percent in the year to October.

Last month’s increase in the CPI was in line with economists’ expectations. The so-called core CPI, which strips out food and energy costs, rose 0.2 percent after edging up 0.1 percent in October. Rents accounted for most of the increase in the core CPI last month. Despite the increase, the year-on-year increase in the core CPI was unchanged at 2.1 percent.

The U.S. central bank on Wednesday raised its benchmark overnight interest rate by 25 basis points to a range of 0.50 percent to 0.75 percent. Fed Chair Janet Yellen said the move was “a vote of confidence in the economy.”

The Fed forecast three rate hikes in 2017 in anticipation of President-elect Donald Trump’s expansionary fiscal policy agenda aimed at boosting growth through infrastructure spending and tax cuts.

The central bank has a 2-percent inflation target and tracks an inflation measure which is currently at 1.7 percent. It noted that inflation had increased since “earlier this year” and said it expected it to rise to its target “over the next couple of years.” Trump’s proposed fiscal policy would come when the economy is viewed as being at full employment.

In a second report, the Labor Department said initial claims for state unemployment benefits fell 4,000 to a seasonally adjusted 254,000 for the week ended Dec. 10. It was the 93rd straight week that claims were below 300,000, a threshold associated with a healthy labor market. That is the longest stretch since 1970, when the labor market was much smaller.

Prices of U.S. Treasuries edged higher after the data, while U.S. stock index futures trimmed losses slightly. The dollar rose to a 14-year high against a basket of currencies.

Gasoline prices rose 2.7 percent last month after jumping 7.0 percent in October. Food prices were unchanged for a fifth straight month. Food consumed at home declined for a seventh consecutive month.

Within the core CPI basket, housing continued its upward march in November. Rents increased 0.3 percent last month, with owners’ equivalent rent of primary residence also gaining 0.3 percent after a similar rise in October.

The cost of medical care services rose 0.2 percent after being unchanged for two straight months. The cost of doctor visits increased 0.6 percent, while prices for prescription medicine fell 0.6 percent. The cost of hospital services slipped 0.1 percent.

There were increases in the prices of a range of other goods last month, including used cars and trucks, which rose for the first time since February. The cost of motor vehicle insurance increased 1.0 percent.

But consumers got some reprieve, with a fall in the cost of apparel reversing October’s increase. Airline fares also declined for a second straight month and prices for new motor vehicles slipped.