U.S. consumer prices post first drop in nine months on gasoline

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer prices fell for the first time in nine months in December amid a plunge in gasoline prices, but underlying inflation pressures remained firm as rental housing and healthcare costs rose steadily.

Overall, the report from the Labor Department on Friday pointed to moderate inflation, which could support recent statements by Federal Reserve officials for caution about raising interest rates this year.

"The Fed will take this as further proof that price pressures are building more slowly than some have feared based on the strong growth of late and tight labor market," said James McCann, senior global economist at Aberdeen Standard Investments. "It certainly seems to justify the Fed's message about being more patient on rate increases."

The Consumer Price Index dipped 0.1 percent last month, the first drop and weakest reading since March. The CPI was unchanged in November. In the 12 months through December, the CPI rose 1.9 percent after increasing 2.2 percent in November.

Excluding the volatile food and energy components, the CPI increased 0.2 percent, advancing by the same margin for a third straight month. In the 12 months through December, the so-called core CPI rose 2.2 percent, matching November's increase.

December's inflation readings were in line with economists' expectations. The CPI rose 1.9 percent in 2018, slowing from a 2.1 percent increase in 2017. The core CPI increased 2.2 percent in 2018, up from 1.8 percent in 2017.

The Fed, which has a 2 percent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.

The core PCE price index increased 1.9 percent year-on-year in November after rising 1.8 percent in October. It hit 2 percent in March for the first time since April 2012.

U.S. Treasury yields held near session lows after the CPI data, while the dollar extended losses against the yen and the euro. U.S. stock index futures were trading lower.

A sharp decline in oil prices amid an oversupply and slowing global economic growth is keeping overall inflation in check. Lower oil prices are also filtering through to core inflation via cheaper airline tickets.

GASOLINE PRICES TUMBLE

The Fed has forecast two rate hikes this year, but several policymakers, including Chairman Jerome Powell, have said they would be cautious about raising interest rates.

Powell reiterated that view on Thursday, saying "especially with inflation low and under control we have the ability to be patient and watch patiently and carefully" while the central bank monitored economic data and financial markets for risks to growth.

Minutes of the U.S. central bank's Dec. 18-19 policy meeting published on Wednesday showed "many" officials were of the view that the Fed "could afford to be patient about further policy firming."

Low inflation is also boosting households' purchasing power, which could keep consumer spending supported.

Inflation-adjusted average weekly earnings surged 0.7 percent in December, the biggest gain since August 2015, after slipping 0.1 percent in November. Weekly earnings increased 1.2 percent in the 12 months to December, the most since July 2016, from 0.6 percent in November.

Last month, gasoline prices dropped 7.5 percent, the largest decrease since February 2016, after tumbling 4.2 percent in November. Food prices increased 0.4 percent. That was the biggest gain since May 2014 and followed a 0.2 percent rise in November. Food consumed at home increased 0.3 percent in December after rising 0.2 percent in the prior month.

Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, advanced 0.2 percent in December after rising 0.3 percent in November.

Healthcare costs increased 0.3 percent last month after jumping 0.4 percent in November. The cost of hospital services surged 0.5 percent, but prices for prescription medication fell 0.4 percent and the cost of doctor visits was unchanged.

Apparel prices were unchanged in December after dropping 0.9 percent in the prior month. Airline fares tumbled 1.5 percent and prices for used motor vehicles and trucks fell 0.2 percent after rising for two straight months.

But prices for household furnishings increased, likely because of tariffs imposed by the Trump administration on a range of imported Chinese goods. New motor vehicle prices were unchanged for a second straight month.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)