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Jan 18, 12:07 PM EST

US consumer prices up moderate 0.3 percent in December

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WASHINGTON (AP) -- U.S. consumer prices, driven up by rising energy costs, rose moderately in December, closing out a year in which consumer inflation rose at the fastest pace in five years.

The Labor Department reported Wednesday that its consumer price index increased 0.3 percent last month, up from a 0.2 percent gain in November. Energy prices, which have been rebounding, were up 1.5 percent, led by another jump in gasoline pump prices. Food costs were unchanged for the fifth straight month.

For all of 2016, prices were up 2.1 percent, compared to a 0.7 percent rise in 2015. It was the largest annual increase since a 3 percent jump in 2011. Core inflation, which excludes food and energy, was up 0.2 percent in December and 2.2 percent for the year.

After four years of extremely low inflation, prices have begun to accelerate with both overall inflation and core inflation above the 2 percent target set by the Federal Reserve. The low inflation figures had allowed the central bank to keep interest rates at ultra-low levels with its key rate at a record low near zero for seven years.

The Fed has now boosted rates twice in December 2015 and again last month by modest quarter-point moves. Fed officials are projecting that they will boost rates another three times in 2017. Fed officials continue to stress that they believe prices will be rising by modest amounts that will allow them to move interest rates up gradually.

Andrew Hunter, U.S. economist at Capital Economics, said that core inflation has been relatively stable, rising at rates just above 2 percent over the past year. He said that would allow the Fed to keep interest rates steady until mid-year. But after that, he said a variety of factors including tax cuts and spending increases supported by the Trump administration will likely prompt the Fed to begin moving rates higher at a faster clip.

"We expect that a sharper acceleration in inflation will eventually force the Fed to tighten policy much more aggressively" in the second half of this year, Hunter said, saying the Fed could hike rates four times this year.

But other analysts said they were still looking for slower rise in rates. Gus Faucher, senior economist at PNC Financial Services Group, said he still believed the Fed would raise rates only twice in 2017, in June and December.

For 2016, food costs actually declined 0.2 percent for the 12 months ending in December while energy costs were up 5.4 percent from a year ago. Currently, the national price for a gallon of regular gasoline is $2.36 up from $1.89 a year ago, according to AAA's Fuel Gauge.

Medical care services was one of the fastest rising categories last year, rising by 3.9 percent over the past 12 months.

New car prices were up a slight 0.3 percent but used car prices were down 3.5 percent and clothing prices were down 0.1 percent over the past 12 months.

In addition to a big fall in energy costs, inflation has been kept low in recent years by a rise in the value of the dollar against foreign currencies which makes imports, including clothing imports, cheaper for U.S. consumers.

The Fed has used low interest rates and other measures to provide a boost for the U.S. economy as it struggled to emerge from the worst recession since the 1930s.

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