US Inflation, Labour Market Data Bolster Fed December Rate Hike Prospects

Washington: US consumer prices recorded their biggest increase in six months in October on rising gasoline costs and rents, suggesting a pickup in inflation that potentially clears the way for the Federal Reserve to raise interest rates in December.

Prospects for a rate hike next month also got a boost from other data on Thursday showing first-time applications for unemployment benefits tumbling to a 43-year low last week and housing starts surging to a nine-year high in October.

The reports painted an upbeat picture of the economy early in the fourth quarter and came as Fed Chair Janet Yellen said the US central bank could raise borrowing costs "relatively soon."

The Labor Department said its Consumer Price Index increased 0.4 per cent last month after rising 0.3 per cent in September. In the 12 months through October, the CPI advanced 1.6 per cent, the biggest year-on-year increase since October 2014. The CPI increased 1.5 per cent in the year to September.

Underlying inflation continued to slow last month as healthcare costs moderated after recent hefty gains. But with rents pushing higher, that trend is unlikely to be sustained.

The so-called core CPI, which strips out food and energy costs, climbed 0.1 per cent last month after a similar gain in September. That slowed the year-on-year increase in the core CPI to 2.1 per cent from a 2.2 per cent rise in September.

The Fed has a 2 per cent inflation target and tracks an inflation measure which is currently at 1.7 percent.

The dollar pared losses against a basket of currencies after the data, while prices for longer-dated US government bonds fell sharply. US stock index futures rose.

In another report, the Labor Department said initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 235,000 for the week ended November 12, the lowest level since November 1973.

Claims have now been below 300,000, a threshold associated with a healthy labour market, for 89 straight weeks. That is the longest run since 1970, when the labour market was much smaller.

Inflation poised to rise

The firming inflation backdrop and labour market that is approaching full employment are likely to encourage the US central bank to raise borrowing costs at its December 13-14 policy meeting. In prepared remarks to lawmakers on Thursday, Ms Yellen said a rate hike would be appropriate if economic data kept pointing to an improving labour market and rising inflation.

"Such an increase could well become appropriate relatively soon," Ms Yellen said.

The Fed this month left interest rates unchanged. The bank lifted its benchmark overnight interest rate last December for the first time in nearly a decade.

Inflation could push higher in the coming years if president-elect Donald Trump's proposal to boost infrastructure and defense spending is implemented. The fiscal stimulus, against the backdrop of full employment, would entail a much faster pace of interest rate hikes than currently anticipated.

Last month, gasoline prices jumped 7.0 per cent after rising 5.8 per cent in September. Gasoline accounted for more than half of the increase in the CPI last month. But households got respite from food prices, which were unchanged for a fourth straight month.

Food consumed at home declined for a sixth consecutive month. Medical care costs were unchanged for a second month as a rise in hospital services was offset by a decline in the cost of doctor visits. Prescription medicine price increases also moderated from September's strong gain.

Rents increased 0.4 per cent last month after rising 0.3 per cent. Owners' equivalent rent of primary residence rose 0.3 per cent after gaining 0.4 per cent in September. Households also paid more for a range of other goods and services last month, including new motor vehicles, apparel, education and tobacco.

The firming labour market and rising rents are boosting the housing sector. In a third report, housing starts jumped 25.5 per cent to a seasonally adjusted annual pace of 1.32 million units last month, the highest level since August 2007.

The per cent increase was the biggest since July 1982. Starts increased in all four regions last month. Single-family homebuilding, which accounts for the largest share of the residential housing market, jumped 10.7 per cent to an 869,000-unit pace in October, the highest in nine years.

Housing starts for the volatile multi-family segment soared 68.8 per cent to a 454,000-unit pace. Starts for buildings with five units or more hit their highest level since June 2015.