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U.S. core inflation slows, puts spotlight on 2018 interest rate outlook

By Lucia Mutikani

By Lucia Mutikani

WASHINGTON (Reuters) - Underlying U.S. consumer inflation slowed in November, held down by weak healthcare costs and the biggest drop in apparel prices in nearly two decades, which could impact the pace at which the Federal Reserve raises interest rates next year.

Inflation has moderated for much of this year, leading to concern among some Fed officials that the factors holding back price pressures could prove more persistent. The U.S. central bank on Wednesday increased borrowing costs for a third time this year, encouraged by a tightening labor market and strengthening economy. It forecast three rate hikes in 2018.

"The lack of a sustained pickup in core CPI does make the Fed deliberations about the pace of monetary policy tightening next year more complicated," said Kathy Bostjancic, head of U.S. macro investor services at Oxford Economics in New York.

The Labor Department said its Consumer Price Index excluding the volatile food and energy components ticked up 0.1 percent also as prices for airline fares and household furnishing fell. The so-called core CPI advanced 0.2 percent in October.

As a result, the annual increase in the core CPI slowed to 1.7 percent in November from 1.8 percent in October.

The Fed has a 2 percent inflation target. The central bank's preferred inflation measure, the core personal consumption expenditures (PCE) price index, has consistently undershot its target for almost 5-1/2 years.

The overall CPI increased 0.4 percent in November after edging up 0.1 percent in October. That raised the year-on-year increase in the CPI to 2.2 percent from 2.0 percent in October.

Prices for U.S. Treasuries rose on the core CPI data and the Fed's interest rate decision, while the dollar fell against a basket of currencies. Stocks on Wall Street were trading higher.

FISCAL STIMULUS

Economists believe inflation will rise next year after Republicans in the U.S. Congress approved plans for sweeping tax cuts, including slashing the corporate income tax rate to about 20 percent from 35 percent. The fiscal stimulus will come at a time when the economy is almost at full employment.

"This expectation supports our forecast for the Fed to raise its policy rate four times next year after increasing it today," said Mickey Levy, chief economist for Americas and Asia at Berenberg Capital Markets in New York.

Last month, the cost of healthcare services slipped 0.1 percent, the first drop since May, with prices for doctor visits falling 0.8 percent. In the 12 months through November, the cost of doctor visits tumbled 1.8 percent, the biggest decline since records started in 1947.

Apparel prices dropped 1.3 percent, the largest fall since September 1998, after dipping 0.1 percent in October. Economists said an unseasonably warm November probably contributed to the decline in apparel prices, as well as competition from online retailers like Amazon <AMZN.O>.

"It was one of the warmest Novembers on record, which means that people would have bought proportionally less full-price winter clothing and more discounted summer/fall clothing," said Paul Ashworth, chief economist at Capital Economics in Toronto. "If we're right, clothing prices will snap back in December."

Owners' equivalent rent of primary residence gained 0.2 percent after rising 0.3 percent in October. Gasoline prices rebounded 7.3 percent after falling 2.4 percent in October.

Food prices were unchanged for a second straight month. Prices for new motor vehicles rose 0.3 percent after two straight monthly declines. There were also increases in prices of alcohol, mobile phone services and tobacco.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Chizu Nomiyama)