US consumer prices rise 0.5% in Jan; core CPI gains 0.3%, largest in a year

US consumer prices rose more than expected in January, with a measure of underlying inflation posting its biggest gain in a year, strengthening expectations that price pressures will accelerate this year and prompt a faster pace of interest rate increases from the Federal Reserve.

The fairly strong inflation report from the Labor Department on Wednesday could put more pressure on US financial markets, which were spooked by a surge in annual wage growth in January.

Inflation concerns sparked a sell-off on Wall Street and boosted benchmark U.S. Treasury yields to a four-year high.

There are fears that inflation, which is seen as being driven by a tightening labour market and increased government spending, could force the Fed to be a bit more aggressive in

raising rates this year than is currently anticipated. That would slow economic growth. The U.S. central bank has forecast three rate hikes for this year, with the first increase expected in March.

The Labor Department said its Consumer Price Index increased 0.5 percent last month as households paid more for gasoline, rental accommodation and healthcare. The CPI rose 0.2 percent in December. The year-on-year increase in the CPI was unchanged at 2.1 percent as the large price gains from last year dropped out

of the calculation.

Excluding the volatile food and energy components, the CPI shot up 0.3 percent. That was the largest increase since January 2017 and followed a 0.2 percent rise in December.

The year-on-year rise in the so-called core CPI was unchanged at 1.8 percent in January, also because of less favourable base effects.

Economists polled by Reuters had forecast the CPI increasing 0.3 percent in January and the core CPI rising 0.2 percent. The core CPI is viewed as a better measure of underlying

inflation trends. The Fed tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently undershot the central bank's 2 percent target since mid-2012.

Inflation Building Up

Base effects will turn more favourable in March, which economists say would set the course for higher annual inflation readings. Average hourly earnings jumped 2.9 percent on an

annual basis in January, the largest rise since June 2009, from 2.7 percent in December.

A pickup in wage growth as the labour market hits full employment is expected to contribute to higher inflation this year. Price pressures are also seen being fanned by fiscal

stimulus in the form of a $1.5 trillion tax cut package and increased government spending.

Last month, gasoline prices rebounded 5.7 percent after falling 0.8 percent in December. Crude oil prices surged in January on strong global demand and a weaker U.S. dollar. Food

prices rose 0.2 percent in January, likely reflecting dollar depreciation.

The core CPI was boosted by rising rents. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, gained 0.3 percent after rising by the same margin in December.

The cost of healthcare services increased 0.4 percent, with prices for hospital care jumping 1.3 percent and doctor visits rising 0.3 percent. Prices for new motor vehicles slipped 0.1 percent last month and apparel prices surged 1.7 percent.

With the January inflation report, the government incorporated some methodology changes which economists say could inject volatility into the data going forward.

Used car prices changed to a single-month price change from a three-month moving average. Smartphones are now quality-adjusted to account for the rapid rate of technological advancements and improved quality to customers.