Overall U.S. consumer prices rose a scant 0.1 percent in December, slowed by falling energy prices. But a closely watched gauge called core inflation — which excludes the volatile categories of food and energy — surged 0.3 percent, the most in 11 months.
The rise in core inflation grabbed attention in financial markets, where investors have been sending bond yields up in recent days out of concern that rising inflation may prompt the Federal Reserve to accelerate the pace of its interest rate hikes. The yield on the two-year Treasury note surpassed 2 percent for the first time since the peak of the financial crisis in late 2008 after the inflation report was released Friday by the Labor Department.
The 0.3 percent seasonally adjusted jump in core inflation was the biggest since an identical increase in January 2017. Over the past six months, core inflation has recorded more benign monthly readings of 0.1 percent or 0.2 percent.
Paul Ashworth, chief U.S. economist at Capital Economics, said the inflation report 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 increases coming this year as inflation strengthens. Last year, the Fed raised its key short-term rate three times.
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The Fed has been trying, so far unsuccessfully, to increase average annual inflation to its target rate of 2 percent. At the same time, the Fed has taken care not to raise rates too quickly out of concern that doing so could derail a steady but slow-growing economy.
"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 percent," Ashworth said.
The slight 0.1 percent rise in overall inflation in December followed a 0.4 increase in November, with both readings heavily influenced by a swing in energy prices. Over the past 12 months, overall inflation has risen 2.1 percent, while core inflation is up just 1.8 percent.
After maintaining a benchmark policy rate at a record low near zero for seven years, the Fed started gradually raising rates modestly — once in December 2015 and again in December 2016. Having raised rates three additional times last year, the central bank has forecast the same number of rate increases this year. But some economists think the Fed might be forced to accelerate the pace if signs emerge that inflation is picking up, given that unemployment is hovering at a 17-year low.
For December, energy prices fell 1.2 percent after surging 3.9 percent in November. The December decline was led by a drop in the price of gasoline. 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 have risen 6.9 percent from December 2016.
Food costs edged up 0.2 percent in December and have increased a modest 1.6 percent over the past year.
Clothing costs are one key sector bucking the trend of higher prices. Clothing costs have fallen the past four months and have declined 1.6 percent over the past year.