Core inflation fastest in more than a year

WASHINGTON (Reuters) - U.S. core consumer prices rose at the fastest pace in more than a year in January, indicating a long period of slowing inflation had run its course.

The Labor Department said on Thursday its core Consumer Price Index, which excludes food and energy costs, increased 0.2 percent -- the largest gain since October 2009. The index rose 0.1 percent in December.

The increase, which was above economists' expectations for a 0.1 percent gain, was driven by rises in the cost of apparel, shelter and airline fares.

Economists largely agreed inflation had bottomed but they said the turnaround in prices was unlikely to be so swift as to trouble policymakers at the Federal Reserve, who are still pumping money into the economy.

"It is in line with our view that the disinflation process bottomed in the fourth quarter. We do not see pricing power being passed along yet," said Michael Gapen, a senior U.S. economist at Barclays Capital in New York.

The still soft inflation scenario was supported by a rise in applications for unemployment benefits last week, which suggested the labor market recovery would remain gradual, restricting wage growth.

Data on Thursday showed that although the economic recovery is gathering steam as the manufacturing sector maintains its strong expansion pace, growth is still not that robust.

The Conference Board's measure of leading indicators rose 0.1 percent to 112.3 in January, following a 0.8 percent gain in December.

U.S. government debt prices rose and the dollar fell broadly. Stocks on Wall Street were lower.

Overall CPI rose 0.4 percent after increasing by the same margin in December. Food and energy accounted for over two-thirds of the rise in overall CPI. Economists had expected headline CPI to rise 0.3 percent last month.

The report came a day after the government reported core wholesale prices increased at their fastest pace in more than two years in January, raising concerns among some investors that inflation might be building up.

Despite the slightly above expectations rise in January, the consumer inflation report tended to support the Fed's views that inflation remains too low.

This is in stark contrast to other economies, where surging commodity prices have put central banks on the alert for inflation. The January consumer inflation report showed prices for new vehicles and used cars declining.

In the 12 months to January, core inflation rose 1.0 percent after rising 0.8 percent in December. That was the largest gain since March. Economists had expected a year-on-year rate of 0.9 percent.

In a second report, the Labor Department said initial claims for state unemployment benefits increased 25,000 to a seasonally adjusted 410,000, partially reversing the prior week's hefty decline.

Economists had forecast claims rising to 400,000. The claims data covers the survey period for part of the government's employment report for February.

But the correlation between claims and nonfarm payrolls has weakened somewhat. Claims have been hovering above the 400,000 mark, a sustained breach of which is regarded by economists as signaling strong jobs growth.

"When I put this with other data out there, it continues to reinforce the idea that things are slowly improving. Not as fast as a lot of people want, but we are improving," said TC Robillard, a senior research analyst at Signal Hill in Baltimore.

Separately, the Philadelphia Federal Reserve Bank said its business activity index rose to 35.9 in February from 19.3 the month before. It was the highest reading since January 2004.

Any reading above zero indicates expansion in the region's manufacturing.

(Reporting by Lucia Mutikani, Additional reporting by Emily Kaiser in Washington, Ryan Vlastelica and Julie Haviv in New York; Editing by Andrea Ricci)

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