U.S. inflation jumps, boosting likelihood of rate hike

Underlying U.S. consumer prices saw their biggest jump in 11 months in December, boosting expectations that inflation will keep the Federal Reserve on the path of raising interest rates.

The Consumer Price Index (CPI), which excludes volatile food and energy components, rose 0.3 per cent last month from November, compared to expectations of a 0.2 per cent increaseby a Reuters poll of economists.

That isthe biggest gain for what is considered the"core" CPI since January 2017. It increased 1.8 per cent in the year to December.

"This, along with the solid retail sales report for the same month, supports our expectation for a March rate hike by the Fed," said Jennifer Lee, senior economist at BMO Capital Markets.

Retail sales rose0.4 per cent in December from the previous month and wasup 5.4 per cent froma year earlier on the back of higher costs for motor vehicles.

The U.S. central bank is forecast to hike its benchmark interest rate three times this year after making three similar hikes last year.

Friday's dataprompted some economists to reiteratean even more bullish view of the Fed's monetary policy.

"It supports our view that the Fed will ultimately increaseinterest rates by a more aggressive 100 basis points
cumulatively this year," said Paul Ashworth, chief U.S.economist at Capital Economics in Toronto.

Rising prices

The big gains in core inflation were driven by the risingcost of rental accommodationand healthcare.

Rents increased 0.4 per cent, while the cost of medical care rose 0.3 per cent, along with the cost of prescription medicine jumping 1 per cent.

"At a very minimum, one can say that core CPI has convincingly stopped declining and is holding firm only a little beneath the Fed's 2 per centinflation target," said Derek Holt, chief economistat Scotiabank.

"That's encouraging in its own right as it says the Fed really isn't that far off from hitting its targets," he added.

Consumer spending accounts for more than two-thirds of the U.S. economy and it increasedat a2.2 per cent annualized rate in the third quarter, when the economy grew 3.2 per cent.