Rising US inflation expected to bring rate hike in June

WASHINGTON • Underlying inflation in the United States increased more than expected last month as rents and medical costs maintained their upward trend, which could keep the US Federal Reserve on course to gradually raise interest rates this year.

The Labour Department said yesterday that its consumer price index (CPI), excluding the volatile food and energy components, increased 0.3 per cent after a similar gain in January.

In the 12 months to the end of February, the so-called core CPI rose 2.3 per cent, the largest gain since May 2012, after increasing 2.2 per cent in January.

Concerns about the economy's growth prospects were raised on Tuesday after the Commerce Department released a weak report on US retail sales, which showed a 0.1 per cent dip last month.

The report reinforced views that the Federal Reserve will leave interest rates unchanged at the end of its two-day meeting, which was due to end last night.

With inflation stirring and the labour market continuing to tighten, economists believe the Fed will raise rates in June.

It raised its benchmark overnight interest rate last December for the first time in nearly a decade.

Other data yesterday showed that the housing market continued to strengthen last month, with groundbreaking activity hitting its highest level in five months after being held back by adverse weather.

The Commerce Department said housing starts increased 5.2 per cent to a seasonally adjusted annual pace of 1.18 million units last month, the highest level since last September.

The rebound in groundbreaking activity could lift first-quarter gross domestic product growth estimates, which were cut on Tuesday, following the retail sales report.

The housing sector is being supported by a firming labour 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 labour, which is driving rents higher in major metropolitan areas.

Meanwhile, the core CPI last month was boosted by a 0.3 per cent increase in rents, which followed a similar gain in January.

Medical care costs rose 0.5 per cent after advancing by the same margin in January.

Prescription drug prices rose 0.9 per cent, while the cost of hospital services increased 0.5 per cent.

REUTERS

A version of this article appeared in the print edition of The Straits Times on March 17, 2016, with the headline 'Rising US inflation expected to bring rate hike in June'. Print Edition | Subscribe