05/17/2016

U.S. consumer prices recorded their biggest increase in more than three years in April as gasoline and rents rose, pointing to a steady inflation build-up that could give the Federal Reserve ammunition to raise interest rates later this year.

Other data on Tuesday showed housing starts rose more than expected last month, with builders ramping up the construction of single and multi-family homes, suggesting the economy was regaining steam early in the second quarter.

The Labor Department said its Consumer Price Index increased 0.4 percent last month, the largest gain since February 2013, after rising 0.1 percent in March. That took the year-on-year increase in the CPI to 1.1 percent from 0.9 percent in March.

Americans also paid more for medical care, food, recreation, tobacco, motor vehicle insurance, airline fares and grooming. Economists polled by Reuters had forecast the CPI gaining 0.3 percent last month and advancing 1.1 percent from a year ago.

The so-called core CPI, which strips out food and energy costs, rose 0.2 percent after climbing 0.1 percent in March. In the 12 months through April, the core CPI increased 2.1 percent after increasing 2.2 percent in March.

The Fed has a 2 percent inflation target and tracks an inflation measure which is currently at 1.6 percent.

The rise in prices in April is likely to be welcomed by Fed officials who last month softened their language on inflation at the end of a regular meeting, noting that it continued to run below target because of "earlier declines in energy prices and falling prices of non-energy imports."

Financial markets have almost priced out a rate hike before September, given sluggish growth at the beginning of the year. The U.S. central bank lifted its benchmark overnight interest rate in December for the first time in nearly a decade and policymakers have forecast two more increases this year.

The dollar rose to a session high against the euro after the data, while U.S. Treasury debt prices fell. 

 

HOUSING STARTS RISE

In a separate report, the Commerce Department said housing starts increased 6.6 percent to a seasonally adjusted annual pace of 1.17 million units last month.

Starts for single-family homes, the largest segment of the market, increased 3.3 percent to a 778,000-unit pace.

Single-family starts in the South, where most home building takes place, jumped 9.0 percent to their highest level since December 2007. Housing starts for the volatile multi-family segment soared 13.9 percent to a 394,000-unit pace.

Building permits rose 3.6 percent to a 1.12 million-unit

rate last month.

While the data on April housing starts added to strong retail sales numbers in suggesting that economic growth regained steam early in the second quarter, a slowdown in payrolls gains last month and a recent spike in new applications for unemployment benefits have raised some concerns about the labor market's health.

The inflation report showed gasoline prices jumped 8.1 percent last month, the largest gain since August 2012, adding to March's 2.2 percent increase. Food prices rose 0.2 percent after falling 0.2 percent in March.

The core CPI was lifted by housing and medical costs, as

well as transportation services. Owners' equivalent rent of primary residence rose 0.3 percent after increasing 0.2 percent in March.

Medical care costs picked up, rising 0.3 percent after gaining 0.1 percent in March. Prescription drugs shot up 0.7 percent and the cost of hospital services increased 0.3 percent.

But apparel prices fell for a second straight month as did the cost of used cars and trucks. Prices for new motor vehicles fell 0.3 percent.

By Lucia Mutikani - Reuters (Editing by Andrea Ricci)