By Harriet Torry
WASHINGTON- -- A closely watched gauge of U.S. consumer prices offered fresh evidence that a long run of very low inflation is ending, raising the possibility the Federal Reserve could pick up its pace of short-term interest rate increases.
A month-over-month measure of what households pay for everything except gasoline and food rose a seasonally adjusted 0.349% in January --the strongest one-month increase since March 2005 -- driven by broad-based increases in costs like rent, apparel and medical services.
"Firms are testing their pricing power," said Sarah House, an economist at Wells Fargo Securities, which she said is "a good sign" they are confident enough to pass higher costs on to customers.
Though it signals a strengthening economy, price pressures are getting investors nervous. Yields on inflation-sensitive U.S. Treasury bonds have been rising. Stocks -- whose values tend to fall when borrowing becomes more costly -- have stopped an upward run and entered a new phase of volatility.
The consumer-price index, which measures what Americans pay for everything from salad dressing to fares on public transportation, rose 0.5% in January, the Labor Department said Wednesday.
In the 12 months to January, overall prices rose 2.1%, beating economists' expectations for a 1.9% rise. A jump in gasoline prices in January helped drive the increase. When stripped of volatile energy and food prices, the index was up 1.8% on the year.
Analysts cautioned that a few components of the CPI report could prove to be aberrations. Apparel prices reversed three months of declines in January, rising 1.7%, the largest monthly increase since February 1990. That category has experienced deflation for large parts of the last two decades thanks to a flood of cheap imports and few analysts see it becoming a new source of inflation now.
In another potential aberration, the cost of vehicle insurance rose 1.3%, its largest monthly increase since November 2001.
Still, the broad inflation trend shows signs of firming as U.S. unemployment falls and the global economy heats up, pressuring the costs of labor and globally traded goods.
Price drops last spring for a handful of items, such as wireless-phone plans, led to a string of soft inflation readings. Fed officials said they expected this would prove transitory, eventually leading to an inflation rebound. Recent data readings suggest that is finally happening and could intensify in the months ahead.
Fed officials target annual inflation of 2%, a level they view as consistent with a healthy economy, but don't want it to shoot much higher. Inflation is closing in on that 2% annual target, although it still isn't officially there yet.
The Fed's 2% goal is based on officials' preferred price measure, the Commerce Department's personal-consumption expenditures price index. The PCE price index was up 1.7% in December from a year earlier, and prices excluding food and energy rose 1.5% on the year. Data for January are due to be released March 1.
The Fed's next policy meeting is March 20-21. Officials in December penciled in three rate increases this year. Investors currently see an 83.1% probability that officials will raise rates a quarter percentage point from their current range between 1.25% and 1.5% at the March meeting, according to Fed-funds futures tracked by CME Group.
In recent years, the Fed and financial markets have occasionally been at odds over how much and how quickly the central banks would raise rates. The Fed began in 2016 expecting to nudge rates up four times in quarter-percentage-point increments, but only moved once that year in December because of recurrent worries about growth, weak inflation, hiring and turbulence overseas. It raised rates three times in 2017.
Recent financial market turbulence, triggered by a separate Labor Department report earlier this month signaling rising U.S. wages, in part reflects fears among market participants rising inflation will prompt the Fed to boost borrowing costs more than three times this year.
Wednesday's higher-than-expected consumer-price index reading "does not constitute an inflation disaster, but it's clearly a threat to markets which still don't fully price-in the three hikes the Fed expects," Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients.
In a sign that speaks against an overheating economy, spending at U.S. retailers dropped in January. Retail and food-services sales -- a measure of consumer spending at U.S. stores, restaurants and websites -- declined a seasonally adjusted 0.3% in January from the prior month, the Commerce Department said Wednesday. That signaled a weak start to the year for consumers despite low unemployment and rising wages.
Write to Harriet Torry at firstname.lastname@example.org
(END) Dow Jones Newswires
February 14, 2018 13:07 ET (18:07 GMT)
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