By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer prices unexpectedly fell in December as the cost of energy goods dropped and prices for a range of services rose moderately, a trend that, if sustained, suggests inflation could be slow to rise toward the Federal Reserve's target.
Other data on Wednesday showed a surprise drop in housing starts last month, adding to a slew of data that have suggested a significant slowdown in economic growth at the end of 2015.
The weak inflation and housing reports could further diminish expectations of another Fed interest rate hike in March.
The Labor Department said its Consumer Price Index slipped 0.1 percent after being unchanged in November. Despite that drop, the CPI increased 0.7 percent in the 12 months through December, the biggest rise in a year. That followed a 0.5 percent gain in November.
Economists had forecast the CPI remaining unchanged last month and rising 0.8 percent from a year ago.
The year-over-year inflation rate is rising as oil price-driven weak readings in 2015 drop out of the calculation. The boost from the so-called base effects could, however, be limited by lower oil prices, which are near 12-year lows.
The 0.7 percent increase in consumer prices in 2015 was the second smallest December-December gain in the last 50 years. Prices increased 0.8 percent in 2014.
The so-called core CPI, which strips out food and energy costs, edged up 0.1 percent after rising 0.2 percent for three straight months. In the 12 months through December, the core CPI rose 2.1 percent, the largest gain since July 2012, after climbing 2.0 percent in November.
U.S. Treasuries pared gains after the data, while the dollar fell modestly against the euro and the yen. U.S. stock index futures trimmed losses.
INFLATION BELOW TARGET
The Fed, which has a 2 percent inflation target, tracks a price measure that is running well below the core CPI.
The soft monthly inflation readings, together with further declines in oil prices, suggest it could be harder for inflation to rise toward the central bank's target this year.
With Fed officials closely watching inflation expectations, financial market conditions tightening and economic growth appearing to have significantly slowed in recent months, the chances of another rate hike in March are diminishing.
Some economists, including JPMorgan have pushed back their rate hike expectations to June. The Fed raised its benchmark overnight interest rate in December by 25 basis points to between 0.25 percent and 0.50 percent, the first hike in almost a decade.
Last month, energy prices dropped 2.4 percent, with gasoline tumbling 3.9 percent. Energy prices declined 1.3 percent in November, while gasoline fell 2.4 percent. Food prices fell for a second straight month.
The increase in the core CPI was kept in check by moderate increases in rents and medical care costs. Owners' equivalent rent of residences increased 0.2 percent after a similar gain in November.
Medical care costs edged up 0.1 percent, slowing from a 0.4 percent rise in November. The cost of doctor visits were unchanged after jumping 1.1 percent. Hospital costs were also unchanged after falling in November.
A strong dollar as well as an inventory bloat is dampening prices for some core goods. Apparel prices fell 0.2 percent, declining for a fourth straight month. Prices for new motor vehicles dipped 0.1 percent, reversing the prior month's increase.
In a separate report, the Commerce Department said housing starts dropped 2.5 percent to a seasonally adjusted annual pace of 1.15 million units as groundbreaking on both single- and multi-family projects fell.
Building permits declined 3.9 percent to a 1.23 million-unit rate last month, pulled down by an 11.4 percent plunge in permits for multi-family buildings. Permits for the construction of single-family homes rose 1.8 percent last month.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)
