WASHINGTON, Jan 11 (Reuters) - U.S. consumer prices increased more than expected in December as Americans paid more for shelter and healthcare, suggesting that it was probably too early for the Federal Reserve to start cutting interest rates.
Expectations for a rate cut in March were also tempered by other data on Thursday showing the labor market remaining tight at the turn of the year, with the number of people filing new claims for unemployment benefits unexpectedly falling last week. The reports followed news last Friday that the economy added 216,000 jobs in November and annual wage growth picking up.
"Overall, today's inflation data makes a March rate cut seem like a less likely scenario," said Charlie Ripley, senior investment strategist at Allianz Investment Management in Minneapolis.
The consumer price index (CPI) rose 0.3% last month after nudging up 0.1% in November, the Labor Department's Bureau of Labor Statistics said. The cost of shelter, which includes rents, hotel and motel stays as well as school housing, accounted for more than half of the increase in the CPI.
Stubbornly high inflation is a political risk for President Joe Biden, seeking a second term in the White House.
Gasoline prices rebounded 0.2% after dropping 6.0% in November. Food prices rose 0.2% for a second straight month. Grocery food prices nudged up 0.1%, matching the prior month's gain. Egg prices surged 8.9%. There were also increases in the costs of meat and dairy products.
But breakfast cereals dropped 2.4%, the largest decrease since January 2007. Vegetables were also a bit cheaper.
In the 12 months through December, the CPI rose 3.4% after increasing 3.1% in November. Economists polled by Reuters had forecast the CPI gaining 0.2% on the month and climbing 3.2% on a year-on-year basis.
Since slowing to an annual increase of 3.0% last June, further progress towards lower consumer inflation has been limited by persistently high rents. The annual increase in consumer prices has cooled from a peak of 9.1% in June 2022.
Financial markets trimmed the odds of a rate cut at the Fed's March 19-20 policy meeting to about 63% from 69% before the release of the data, according to CME Group's FedWatch Tool. The Fed has hiked its policy rate by 525 basis points to the current 5.25%-5.50% range since March 2022.
U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
GOODS DEFLATION STALLS
Excluding the volatile food and energy components, the CPI rose 0.3% last month after rising by the same margin in November. The so-called core CPI was driven by higher rents.
Owners' equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, also rose 0.5% after a similar gain in November. Shelter costs increased 0.5% after climbing 0.4% in the prior month.
Rental inflation has remained elevated despite anecdotal evidence suggesting that demand for rental housing had ebbed. There is also a large stock of apartment buildings in the pipeline, which could increase supply this year.
As a result, services inflation remained sticky, gaining a solid 0.5%, also reflecting a 0.6% increase in healthcare. Goods price deflation stalled last month amid the second straight monthly increase in the cost of used cars and trucks. Goods prices rose 0.1% after dropping 0.7% in November.
The core CPI advanced 3.9% on a year-on-year basis in December, the smallest gain since May 2021, after rising 4.0% in November. With the resilient labor market keeping wage growth elevated, some economists expect a rate cut in May or June.
The labor market is easing, but only gradually as layoffs remain low by historical norms. In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits fell 1,000 to a seasonally adjusted 202,000 for the week ended Jan. 6.
Economists had forecast 210,000 claims for the latest week.
Claims data tend to be volatile at the start of the year. Filings remain in the lower end of the 194,000-265,000 range that prevailed in 2023. Employers are hoarding workers following difficulties finding labor in the aftermath of the COVID-19 pandemic, keeping a recession at bay.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, dropped 34,000 to 1.834 million during the week ending Dec. 30, the claims report showed.
The so-called continuing claims have mostly increased since mid-September, a trend blamed mainly on difficulties adjusting the data for seasonal fluctuations after an unprecedented surge in filings early in the pandemic.
Economists expect the distortion will be smoothed out when the government revises the data this year.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci
