Core inflation posts largest gain in 4-1/2 years

Rising rents and medical costs lifted underlying U.S. inflation in January by the most in nearly 4-1/2 years, signs of an uptick in price pressures that could allow the Federal Reserve to gradually raise interest rates this year.

The Labor Department said on Friday its Consumer Price Index, excluding the volatile food and energy components, increased 0.3 percent last month. That was the biggest gain since August 2011 and followed a 0.2 percent rise in December.

In the 12 months through January, the core CPI advanced 2.2 percent, the largest rise since June 2012. The CPI had increased 2.1 percent in December. The Fed has a 2 percent inflation target and monitors a price measure that is running well below the core CPI.

Economists polled by Reuters had forecast core CPI up 0.2 percent last month and increasing 2.1 percent from a year ago.

Inflation is being watched for clues on whether the Fed would continue raising interest rates this year after the U.S. central bank lifted borrowing costs in December for the first time in nearly a decade.

Tighter financial market conditions in the wake of a recent sharp stock market sell-off and slowing domestic and global growth have almost wiped out bets for a March rate increase.

Signs of a pick-up in underlying inflation are likely to be welcomed by Federal Reserve officials, but significant gains remain a challenge against the backdrop of very low inflation expectations by households.

Still, the firming in the core CPI, together with a strengthening labor market suggest rate hikes for the rest of the year remain on the table.

The overall CPI was unchanged last month after slipping 0.1 percent in December. The CPI increased 1.4 percent in the 12 months through January, the biggest rise since October 2014, after gaining 0.7 percent in December.

The year-over-year inflation rate is rising as the oil price-driven weak readings in 2015 wash out of the calculation.

The government on Wednesday published revisions to the inflation data going back five years. Those revisions showed both the monthly CPI and core CPI readings a bit firmer in the last months of 2015 than previously reported.

Last month, the rental index increased 0.3 percent after a similar gain in December. Medical care costs rose 0.5 percent, with prices for prescription drugs also increasing 0.5 percent. The cost of doctor visits edged up 0.1 percent after falling 0.2 percent in December. Hospital costs increased 0.4 percent.

Apparel prices rose 0.6 percent after falling for four straight months. The increase in apparel is surprising as retailers have been offering deep discounts to sell unwanted inventory. Prices for new motor vehicles advanced 0.3 percent.

Gasoline prices fell 4.8 percent, while food prices were unchanged.