WASHINGTON — U.S. consumer prices were unchanged in November as declines in energy and food held down overall costs. But core inflation was up 2 percent over the 12 months ending in November. That was the fastest pace in more than a year and the kind of increase Fed officials want to see to justify the start of a round of interest rate increases.
The flat reading for consumer prices last month followed a modest 0.2 percent increase in October and outright declines in August and September, the Labor Department reported Tuesday. Core inflation, which excludes energy and food, was up 0.2 percent in November and has risen 2 percent over the past 12 months, the fastest gain since a similar 2 percent rise for the 12 months ending in May 2014.
Over the past year, overall inflation has risen just 0.5 percent. Overall prices are being held back by a sharp fall in energy costs and a stronger dollar, which makes imports cheaper. Fed Chair Janet Yellen has said she expects both of those impacts will soon start to fade and because of that she expects overall inflation will start rising back to the Fed's 2 percent target.
Private economists said Fed officials, who were holding their final meeting of the year on Tuesday and Wednesday, are likely to use the rise in core prices as justification to support a quarter-point rate hike at this meeting, the first rate increase in nearly a decade.
Paul Ashworth, chief U.S. economist at Capital Economics, said he expects rising inflation will prompt the Fed to raise its key interest rate to near 2 percent by this time next year. This rate has been at a record low near zero for the past seven years. Other economists are predicting a much more gradual rise in rates of less than half that amount to around 1 percent for the Fed's benchmark federal funds rate.
Overall energy costs fell 1.3 percent in November, led by a 2.4 percent drop in gasoline pump prices, the third decline in gasoline costs in the past four months.
Nationwide gas prices now stand at $2.01 per gallon, according to AAA's Daily Fuel Gauge. That is down from $2.56 a year ago. In some parts of the country, gas is already below $2 per gallon.
Food costs retreated 0.1 percent in November, the first monthly decline since March. The price of meats, poultry, fish and eggs dropped for the third month in a row.
Meanwhile, prices rose in some categories. Medical care climbed 0.4 percent, and airline fares grew 1.2 percent.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the increase in medical costs reflected in part a jump in the cost of health insurance, with premiums up 3.6 percent over the past 12 months, compared to a 1 percent drop in premium costs for the 12 months ending in November 2014.
Jennifer Lee, senior economist at BMO Capital Economics, said the low overall inflation would not stop the Fed from starting to raise interest rates, given the long-held view that if the Fed waits to start raising interest rates until inflation becomes a problem, then it will have waited too long.
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