(Adds details analyst comments, updates markets)
* Core Consumer Price Index rises 0.3 percent in December
* Core CPI increases 1.8 percent year-on-year
* CPI gains 0.1 percent; up 2.1 percent year-on-year
* Retail sales rise 0.4 percent; core sales up 0.3 percent
WASHINGTON, Jan 12 (Reuters) - Underlying U.S. consumer prices recorded their largest increase in 11 months in December on gains in the cost of rental accommodations and healthcare, bolstering expectations that inflation will accelerate this year.
The strengthening domestic demand was also underscored on Friday by other data showing retail sales increasing at a solid clip in December. The reports probably will keep the Federal Reserve on course to increase interest rates in March and raise the prospects of a more aggressive monetary policy tightening this year.
The U.S. central bank is forecasting three rate increases this year, the same number as in 2017.
"It supports our view that the Fed will ultimately increase interest rates by a more aggressive 100 basis points cumulatively this year," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
The Labor Department said its Consumer Price Index, excluding the volatile food and energy components, rose 0.3 percent last month as prices for new and used cars and trucks and motor vehicle insurance increased.
That was the biggest advance in the so-called core CPI since January 2017 and followed a 0.1 percent gain in November. It increased 1.8 percent in the 12 months through December, picking up from 1.7 percent in November.
Economists polled by Reuters had forecast core CPI rising 0.2 percent month-on-month and holding steady at 1.7 percent on an annual basis.
Weak import and producer price data this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI.
Economists are hoping that a tightening labor market, rising commodity prices and a weak dollar will lift inflation toward the Fed's 2 percent target this year. The central bank's preferred inflation measure, the personal consumption expenditures price index excluding food and energy, has missed its target since May 2012.
The dollar briefly trimmed losses against a basket of currencies after the CPI data, but later slumped to a four-month low. Prices for U.S. Treasuries fell, with the yield on the interest-rate sensitive two-year note rising to its highest since 2008.
BROAD PRICE INCREASES
Supporting the rise in underlying inflation pressures last month, rents increased 0.4 percent. Owners' equivalent rent of primary residence climbed 0.3 percent after gaining 0.2 percent in November.
The cost of medical care increased 0.3 percent, with prices for prescription medication surging 1.0 percent after rising 0.6 percent in November. The cost of both hospital and doctor visits increased 0.3 percent.
Households also paid more for new motor vehicles, whose average price rose 0.6 percent in price last month, the biggest gain since January 2017. The cost of motor vehicle insurance increased 0.6 percent.
Apparel prices, however, fell 0.5 percent.
Cheaper gasoline prices limited the increase in the overall CPI to 0.1 percent in December after a 0.4 percent rise in November. That lowered the year-on-year increase in the CPI to 2.1 percent from 2.2 percent in November.
Last month, gasoline prices fell 2.7 percent after rebounding 7.3 percent in November. Food prices rose 0.2 percent after being unchanged for two straight months.
Separately, the Commerce Department said retail sales rose 0.4 percent last month. It revised November data to show a gain of 0.9 percent instead of the previously reported 0.8 percent increase. Retail sales rose 5.4 percent from a year earlier.
Sales last month included a 1.2 percent jump in receipts at gardening and building material stores and a 0.2 percent rise for auto dealerships.
Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.3 percent last month after an upwardly revised 1.4 percent surge in November.
These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. The Commerce Department previously said they had increased 0.8 percent in November.
Last month's increase in retail sales and the sharp upward revision to November data bolsters economists' expectations of data showing an acceleration in consumer spending in the fourth quarter.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 percent annualized rate in the third quarter. The economy grew at a 3.2 percent pace during that period.
"The upward revisions to November and October put consumer spending on a stronger upward trajectory than we thought," said John Ryding, chief economist at RDQ Economics in New York.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Lisa Von Ahn)