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Rents boost U.S. core inflation; retail sales rise solidly

A customer shops at a grocery store in Los Angeles on Nov. 21, 2017.

Lucy Nicholson/REUTERS

Underlying U.S. consumer prices recorded their largest increase in 11 months in December on gains in the cost of rental accommodations and healthcare, bolstering expectations that inflation will accelerate this year.

The strengthening domestic demand was also underscored on Friday by other data showing retail sales increasing at a solid clip in December. The reports probably will keep the Federal Reserve on course to increase interest rates in March and raise the prospects of a more aggressive monetary policy tightening this year.

The U.S. central bank is forecasting three rate increases this year, the same number as in 2017.

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"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.

The Labor Department said its Consumer Price Index, excluding the volatile food and energy components, rose 0.3 per cent last month as prices for new and used cars and trucks and motor vehicle insurance increased.

That was the biggest advance in the so-called core CPI since January 2017 and followed a 0.1 per cent gain in November. It 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 data this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI.

Economists are hoping that a tightening labor market, rising commodity prices and a weak dollar will lift inflation toward the Fed's 2 per cent target this year. The central bank's preferred inflation measure, the personal consumption expenditures price index excluding food and energy, has missed its target since May 2012.

The dollar briefly trimmed losses against a basket of currencies after the CPI data, but later slumped to a four-month low. Prices for U.S. Treasuries fell, with the yield on the interest-rate sensitive two-year note rising to its highest since 2008.

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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 1.0 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, whose average price rose 0.6 per cent in price last month, the biggest gain since January 2017. 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 a 0.4 per cent rise in November. That lowered the year-on-year increase in the CPI to 2.1 per cent from 2.2 per cent in November.

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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.

Separately, the Commerce Department said retail sales rose 0.4 per cent last month. It revised November data to show a gain of 0.9 per cent instead of the previously reported 0.8 per cent increase. Retail sales rose 5.4 per cent from a year earlier.

Sales last month included a 1.2 per cent jump in receipts at gardening and building material stores and a 0.2 per cent rise for auto dealerships.

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. The Commerce Department previously said they had 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 data showing an acceleration in consumer spending in the fourth quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 per cent annualized rate in the third quarter. The economy grew at a 3.2 per cent pace during that period.

"The upward revisions to November and October put consumer spending on a stronger upward trajectory than we thought," said John Ryding, chief economist at RDQ Economics in New York.

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