12/15/2015

Underlying inflation pressures rose in November, which could give the Federal Reserve more confidence to raise interest rates on Wednesday, even as renewed weakness in gasoline prices kept overall U.S. consumer prices in check.

The Labor Department said on Tuesday its so-called core Consumer Price Index, which excludes food and energy, increased 0.2 percent last month. It was the third straight month that the core CPI increased by that margin.

In the 12 months through November, the core CPI rose 2.0 percent, the largest gain since May 2014, after rising 1.9 percent in October. The Fed targets 2 percent inflation and it tracks an index that is running far below the core CPI.

The inflation report was released just hours before Fed officials were due to gather for a two-day meeting. The U.S. central bank is expected to lift its benchmark overnight interest rate from near zero at the end of the meeting on Wednesday, encouraged by a strengthening labor market.

There is optimism that tightening labor market conditions, characterized by a jobless rate now in a range that some Fed

officials view as consistent with full employment, and strong domestic demand will put upward pressure on wages and drive inflation toward its target.

The dollar's pace of appreciation is expected to slow next year, which could ease some of the pressure on goods prices.

U.S. Treasury debt prices fell to session lows, while the dollar rose against a basket of currencies after the data.

The increase in core CPI last month reflected steady gains in the cost of rents, airline fares, new motor vehicles and medical care. They were, however, offset by falling gasoline prices, leaving the overall CPI unchanged last month after a 0.2 percent increase in October.

In the 12 months through November, the CPI increased 0.5 percent, the largest gain since last December, after rising 0.2 percent in October

Within the core CPI, rents increased 0.2 percent after rising 0.3 percent in October. They were up 3.6 percent in the 12 months through November, reflecting rising demand for rental accommodation as more Americans shun homeownership.

Medical care costs increased 0.4 percent. The cost of doctor visits increased 1.1 percent, while prescription drug prices advanced 0.4 percent. Hospital costs, however, fell 0.2 after rising in October.

But dollar strength, as well as an inventory glut is keeping price increases for some core goods in check. Apparel prices fell 0.3 percent, declining for a third straight month. Prices for new motor vehicles edged up 0.1 percent.

Airline fares increased 1.2 percent after rising 1.5 percent in November. There were also increases in the cost of tobacco, education, communication and motor vehicle insurance.

Energy prices fell 1.3 percent, with gasoline prices dropping 2.4 percent after rising 0.4 percent in October. The cost of electricity, however, increased 0.3 percent. Food prices dipped 0.1 percent, reversing the prior month's gain.

Every major grocery store food group index, except fruits and vegetables, fell last month.

By Lucia Mutikani - Reuters (Editing by Andrea Ricci)