U.S. consumer prices rose in December as households paid more for gasoline and rental accommodation, leading to the largest year-on-year increase in 2-1/2 years and signaling that inflation pressures could be building.
Other data on Wednesday showed U.S. industrial production recording its biggest increase in two years. Rising inflation and stronger economic growth, if sustained, may push the Federal Reserve to raise interest rates at a faster pace than currently anticipated.
"Further momentum in consumer prices could add to the perception of a more hawkish Fed and the potential for more aggressive tightening," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.
The Labor Department said its Consumer Price Index rose 0.3 percent last month after a 0.2 percent gain in November. In the 12 months through December, the CPI increased 2.1 percent, the biggest year-on-year rise since June 2014. The CPI rose 1.7 percent in the year to November.
The gains were in line with economists' expectations. The CPI increased 2.1 percent in 2016, up from a gain of 0.7 percent in 2015.
The dollar rose against a basket of currencies on the inflation data, while prices for U.S. government bonds fell. U.S. stocks were trading mostly higher.
The so-called core CPI, which strips out food and energy costs, rose 0.2 percent last month after the same increase in November. As a result, the core CPI was up 2.2 percent in the 12 months through December, from 2.1 percent in November.
The Fed has a 2 percent inflation target and tracks an inflation measure which is currently at 1.6 percent. Rising wages due to a tightening labor market also is contributing to higher inflation.
Average hourly earnings increased in December at their quickest pace since June 2009, a government report showed earlier this month.
Price pressures are likely to remain on an upward trend amid expectations of fiscal stimulus from the incoming Trump administration. Republican businessman-turned-politician Donald Trump, who will be sworn in as U.S. president on Friday, has pledged to increase infrastructure spending and cut taxes.