WASHINGTON Underlying U.S. inflation increased more than expected in February as rents and medical costs maintained their upward trend, which could keep the Federal Reserve on course to gradually raise interest rates this year.
Other data on Wednesday showed the housing market continuing to strengthen last month and manufacturing stabilizing. While the Fed is expected to stand pat at its policy meeting on Wednesday, stirring inflation, a steady housing sector and tightening labor market conditions have raised the probability of a rate hike in June.
"The Fed could easily signal that rate hikes are coming, possibly sooner than most think. Today's numbers, especially the inflation report, is a warning that the days of no price pressures are behind us," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
The Labor Department said its Consumer Price Index, excluding the volatile food and energy components, rose 0.3 percent last month after a similar gain in January.
That lifted the so-called core CPI 2.3 percent in the 12 months through February, the largest increase since May 2012, after it advanced 2.2 percent in January. Economists polled by Reuters had forecast the core CPI rising 0.2 percent last month and increasing 2.2 percent from a year ago.
The Fed has a 2 percent inflation target and monitors a price measure that has also pushed higher in recent months. The U.S. central bank raised its benchmark overnight interest rate in December for the first time in nearly a decade.
The dollar rose against a basket of currencies, while prices for U.S. Treasury debt fell. U.S. stocks were little changed, though the S&P homebuilding index rose 0.34 percent as D.R. Horton Inc and Lennar Corp shares gained.
HOUSING, MANUFACTURING IMPROVING
In a separate report, the Commerce Department said housing starts increased 5.2 percent to a seasonally adjusted annual pace of 1.18 million units last month, the highest level in five months.
Groundbreaking activity had been held back by adverse weather. While the rebound in housing starts offered a lift to first-quarter gross domestic product growth estimates, that was offset by a drop in utilities output as temperatures warmed up in February.
First-quarter growth is forecast around a 2 percent annual rate, an acceleration from the 1.0 percent rate logged in the final three months of the year.
In a third report, the Fed said industrial production declined 0.5 percent as mining and utilities tumbled. Industrial production rose 0.8 percent in January. But manufacturing output increased 0.2 percent last month after spiking 0.5 percent in January.
The rise in factory output added to manufacturing surveys in suggesting that the downturn in the sector, which accounts for 12 percent of the U.S. economy, had probably run its course. Factories have been hit by dollar strength and lower oil prices.
"The overall outlook for the U.S. industrial sector is beginning to look a little better," said Millan Mulraine, deputy chief U.S. economist at TD Securities in New York.
The housing sector is being supported by a firming labor market, which is encouraging young adults to leave their parents' homes. But builders cannot keep up with the demand for housing because of a shortage of lots and skilled labor, which is driving rents higher in major metropolitan areas.
The second month of broad increases in the core CPI was driven by a 0.3 percent increase in rents, which followed a similar gain in January.
Medical care costs rose 0.5 percent after advancing by the same margin in January. Prescription drug prices rose 0.9 percent, while the cost of hospital services increased 0.5 percent. Apparel prices rose by the most in seven years.
The second straight month of increase in apparel prices is rather surprising given that retailers have been giving big discounts to clear unwanted merchandise from their warehouses.
Consumers also paid more for new motor vehicles and used cars and trucks. But a 13 percent drop in gasoline prices, which offset both the increase in core CPI and a 0.2 percent gain in food prices, lead to the overall CPI falling 0.2 percent in February. The CPI was unchanged in January.
Last month's drop resulted in the CPI increasing 1.0 percent in the 12 months through February, slowing after a 1.4 percent rise in January.
(Reporting by Lucia Mutikani; Additional reporting by Jason Lange; Editing by Andrea Ricci)
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