05/22/2015 12:30 EDT | Updated 05/22/2016 05:59 EDT

US consumer prices up in April for third month, paving way for Fed to raise rates this year

WASHINGTON - Core consumer prices outside of food and energy posted the biggest increase in April in more than a year, suggesting that an improving U.S. economy is finally starting to lift prices. That could prompt the Federal Reserve to start raising interest rates later this year.

Overall consumer prices edged up 0.1 per cent for the third straight climb, the Labor Department said Friday. Overall gains were held back by a 1.3 per cent drop in energy costs.

But excluding food and energy, core inflation rose 0.3 per cent in April, marking the biggest one-month increase since January 2013. That means core inflation has risen at an annual rate of 2.6 per cent over the past three months — the fastest pace in four years.

Paul Ashcroft, chief U.S. economist at Capital Economics, said while overall inflation still remains very low, the trend in core prices is likely to spark concerns at the central bank. The Fed has kept interest rates at ultra-low levels for the past six years to help the economy recover from a deep recession.

"The Fed can't wait forever before beginning to raise interest rates," Ashcroft said, agreeing with many other economists that the Fed will likely start raising rates in September.

The increase in the core rate was driven by a 0.7 per cent surge in medical costs, reflecting higher hospital charges.

Jennifer Lee, senior economist at BMO Capital Markets, said that both overall inflation and core prices have accelerated modestly over the past six months.

"This suggests that although inflation remains very tame, economic growth, sporadic as it is, ... is helping prices stabilize instead of fall," Lee said in a note to clients.

Overall inflation still remains very low. Consumer prices are down 0.2 per cent from 12 months ago, reflecting a nearly 20 per cent drop in energy prices. And even with the April increase, core prices are up a moderate 1.8 per cent from a year ago.

But analysts noted price increases in a number of areas in April. In addition to medical costs, the price of used cars, household furnishings and rent payments all climbed last month.

"While inflation is not a major concern, the pattern of prices is changing," said Joel Naroff, chief economist at Naroff Economic Advisors. "It used to be hard to find any category where costs were going up but now the opposite is true. Most categories are posting increases."

In April, gasoline prices on a seasonally adjusted basis fell 1.7 per cent after having posted increases in the past two months. The nationwide average for gasoline is currently $2.73, according to the AAA Daily Fuel Gauge. While that is up 27 cents from a month ago, it is still 91 cents below the level a year ago.

Inflation by a price gauge preferred by the Federal Reserve has been running below the Fed's 2 per cent target for nearly three years. The Fed aims to keep prices rising at this level, which it views as achieving its goal of price stability. Anything below that target raises the danger of deflation, when prices fall so sharply that they can disrupt economic growth.

The Fed has kept interest rates at near zero in an effort to stimulate stronger economic growth and re-establish the millions of jobs lost during the 2007-2009 recession. Fed officials have said they want to be "reasonably confident" that inflation is headed toward their 2 per cent target, which would signal a stronger economy, before they start raising rates.

With strong employment gains over the past year and economic growth expected to rebound after a winter slowdown, many economists believe the Fed will start lifting rates later this year.

Minutes of their discussions at their last meeting in April indicated that it is unlikely the first rate hike will occur at the Fed's June meeting. Many economists are now predicting the Fed will wait until at least September.