U.S. Consumer Prices Fall on Lower Energy Prices

U.S. consumer prices unexpectedly fell in December as the cost of energy goods dropped and services rose moderately, a trend that if sustained suggests inflation could be slow to rise toward the Federal Reserve's target.

The Labor Department said on Wednesday its Consumer Price Index slipped 0.1 percent after being unchanged in November. Despite the drop last month, the CPI increased 0.7 percent in the 12 months through December, the biggest increase in a year.

The rise followed a 0.5 percent gain in November. The year-over-year inflation rate is rising as the oil price-driven weak readings in 2015 drop out of the calculation. The boost from the so-called base effects could, however, be limited by lower oil prices, which are near 12-year lows.

Economists polled by Reuters had forecast the CPI unchanged last month and rising 0.8 percent from a year ago.

The so-called core CPI, which strips out food and energy costs, edged up 0.1 percent after rising 0.2 percent for three straight months. In the 12 months through December, the core CPI rose 2.1 percent, the largest gain since July 2012, after climbing 2.0 percent in November.

The Fed, which has a 2 percent inflation target, tracks a price measure that is running well below the core CPI.

The soft monthly inflation readings, together with further declines in oil prices suggest it could be harder for inflation to rise toward the central bank's target this year.

With Fed officials watching inflation expectations, financial market conditions tightening and economic growth appearing to have significantly slowed in recent months, the chances of another interest rate hike in March are diminishing.

Some economists, including JPMorgan have pushed back their rate hike expectations to June. The Fed raised its benchmark overnight interest rate in December by 25 basis points to between 0.25 percent and 0.50 percent, the first hike in almost a decade.

Last month, energy prices dropped 2.4 percent, with gasoline tumbling 3.9 percent. Energy prices declined 1.3 percent in November, while gasoline fell 2.4 percent. Food prices fell for a second straight month.

The increase in the core CPI was kept in check by moderate increases in rents and medical care costs. Owners' equivalent rent of residences increased 0.2 percent after a similar gain in November. It was up 3.1 percent in the 12 months through December, reflecting rising demand for rental accommodation as more young people find employment.

Medical care costs edged up 0.1 percent, slowing from a 0.4 percent rise in November. The cost of doctor visits were unchanged after jumping 1.1 percent. Hospital costs were also unchanged after falling in November

A strong dollar, as well as an inventory bloat is dampening prices for some core goods. Apparel prices fell 0.2 percent, declining for a fourth straight month. Prices for new motor vehicles dipped 0.1 percent, reversing the prior month's increase.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)