WASHINGTON (Reuters) – U.S. consumer prices increased solidly in December amid a surge in the cost of gasoline, though underlying inflation remained tame as the economy battled a raging COVID-19 pandemic that has weighed on the labor market and services industry.
Inflation could, however, briefly accelerate this year as the government provides more money to stimulate the economy, and the consumer price declines early in the coronavirus crisis wash out of the calculations.
But that will unlikely have an impact on the Federal Reserve, which has signaled it would tolerate higher prices after inflation persistently undershot the U.S. central bank’s 2% target. The Fed has slashed interest rates to near zero and is pumping money into the economy through asset purchases.
Economists expect the ultra-easy monetary policy stance to last through at least until 2024.
“We are likely to see a near-term spike in inflation on base effects of a reopening economy in 2021 versus a calamitous period in 2020, but that will fade through the second half of 2021,” said James Knightley, chief international economist at ING in New York. “Longer-term inflation is going to be primarily driven by wage costs given this is a service sector economy.”
The consumer price index increased 0.4% last month after gaining 0.2% in November, the Labor Department said on Wednesday. An 8.4% jump in gasoline prices accounted for more than 60% of the rise in the CPI. Food prices also rebounded. The rise in the CPI was in line with economists’ expectations.
In the 12 months through December, the CPI advanced 1.4% after increasing 1.2% in November. The annual inflation rate is below the 1.7% average over the last 10 years.
Excluding the volatile food and energy components, the CPI edged up 0.1% after climbing 0.2% in November. The so-called core CPI was restrained by decreases in the prices of used cars and trucks, recreation, airfares and healthcare.
The core CPI gained 1.6% on a year-on-year basis, matching November’s rise, and is below the 2.0% average over the past 10 years. The Fed tracks the core personal consumption expenditures (PCE) price index for its inflation target, a flexible average. The core PCE price index is at 1.4%.
The services sector, which accounts for more than two-thirds of the U.S. economy, has been hardest hit by the virus.
Stocks on Wall Street were trading mixed. The dollar rose against a basket of currencies. U.S. Treasury prices were mostly higher.
The government approved nearly $900 billion in additional pandemic relief in late December. More fiscal stimulus is expected from President-elect Joe Biden’s incoming administration and a Congress that will soon be controlled by Democrats.
Biden, who will be sworn in next Wednesday, is expected to unveil a plan this week that will include…
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