US consumer prices post first drop in 10 months on weak gasoline

WASHINGTON, April 11 (Reuters) - U.S. consumer prices fell for the first time in 10 months in March, weighed down by a decline in the cost of gasoline, but underlying inflation continued to firm amid rising prices for healthcare and rental accommodation.

The Labor Department said on Wednesday its Consumer Price Index slipped 0.1 percent last month, the first and largest drop since May 2017, after climbing 0.2 percent in February.

In the 12 month through March, the CPI increased 2.4 percent. That was the largest annual gain in a year and followed February's 2.2 percent increase. Annual inflation is rising as the weak readings from last year drop from the calculation.

Excluding the volatile food and energy components, the CPI climbed 0.2 percent, matching February's increase. The so-called core CPI rose 2.1 percent year-on-year in March, the largest advance since February 2017, after increasing 1.8 percent in February. The core CPI is now well above the 1.8 percent annual average increase over the past 10 years.

Economists had forecast the CPI unchanged in March and the core CPI rising 0.2 percent. The soft headline monthly inflation reading is likely to be temporary as a report on Tuesday showed producer prices rising solidly in March amid strong increases in healthcare and food costs.

The Federal Reserve tracks a different index, the personal consumption expenditures price index excluding food and energy, which has consistently run below the central bank's 2 percent target since mid-2012.

But with the labor market tightening, the dollar weakening and the stimulus from a $1.5 trillion income tax cut package and increased government spending still to impact on the economy, economists expect inflation will breach its target sometime this year.

They argue that this scenario could compel the Fed to increase interest rates three more times this year. The U.S. central bank raised borrowing costs last month and forecast at least two more rate hikes in 2018.

Gasoline prices tumbled 4.9 percent in March, the largest drop since last May, after falling 0.9 percent in February. Food prices edged up 0.1 percent after being unchanged in February.

The core CPI was lifted by rising rents and healthcare costs. Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, increased 0.3 percent last month after climbing 0.2 percent in February.

Healthcare costs increased 0.4 percent, with prices for hospital care shooting up 0.6 percent and the cost of doctor visits rising 0.2 percent. Apparel prices fell 0.6 percent after two straight months of robust increases.

There were also declines in the cost of telecommunication, used cares and trucks, tobacco and education.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)