By Lucia Mutikani
WASHINGTON, (Reuters) - U.S. consumer prices recorded their largest increase in more than a year in May as costs for a range of goods and services rose, likely easing the Federal Reserve's concerns that inflation was running too low.
The Labor Department said on Tuesday its Consumer Price Index increased 0.4 percent last month, with food prices posting their biggest rise since August 2011.
Economists, who had expected consumer prices to rise only 0.2 percent, said the increase suggested a separate inflation gauge watched by the Fed also pushed higher in May, although it would still fall short of the central bank's 2 percent target.
"Consumer prices are gaining traction, suggesting inflation is moving close to the Fed's target," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. "Fed officials will have to acknowledge the firming price environment."
Fed officials who started a two-day policy meeting on Tuesday will evaluate the data among other reports that have given bullish signals on the economy.
The Fed is expected to further trim its monthly bond buying program, but it is expected to hold off raising interest rates until some time next year to let the economy gather strength.
The broadening rise in prices should reassure Fed officials who have expressed concerns that inflation was too low, and it led some investors to raise bets the central bank would hike interest rates before the middle of 2015.
"At the margin, today's inflation print further tilts the odds toward an earlier first rate hike relative to our current fourth quarter of 2015 call," said Michael Feroli, an economist at JPMorgan in New York.
Prices for U.S Treasury debt fell on the inflation data, while the dollar rose against a basket of currencies. U.S. stock prices were trading slightly higher.
HOUSING STARTS, PERMITS FALL
A range of indicators from manufacturing output to services sector activity and employment have suggested the economy has rebounded from a winter slump.
The housing market, however, remains a weak spot. Fed Chair Janet Yellen warned last month that a protracted housing slowdown could undermine the economy.
Groundbreaking for homes fell 6.5 percent to a seasonally adjusted annual pace of 1 million units in May, the Commerce Department said in a separate report. Construction permits declined 6.4 percent to a 991,000-unit rate.
May's rise in consumer prices built on a 0.3 percent advance in April. With tensions escalating in Iraq, a major world oil producer, inflation is likely to push higher in the coming months.
In the 12 months through May, consumer prices increased 2.1 percent, the biggest gain since October 2012. That followed a 2.0 percent rise in the period through April, marking the first back-to-back months in which the year-on-year CPI had risen at least 2 percent since early 2012.
Stripping out food and energy prices, the so-called core CPI rose 0.3 percent, the largest increase since August 2011.
In the 12 months through May, the core CPI increased 2.0 percent, up from 1.8 percent in April and the biggest gain since February of last year.
Food prices increased 0.5 percent in May, the fifth consecutive monthly increase. There were also increases in prices for gasoline and electricity.
Within the core CPI, the cost of rents, medical care, apparel and new cars all rose, and airline fares recorded their largest gain since July 1999.
(Reporting by Lucia Mutikani; Editing by Paul Simao)