US inflation data for the month of December released by the Bureau of Labor Statistics today showed the consumer price index (CPI) increased 2.1% year-on-year, following a 1.7% rise in November. The figures were largely in line with market expectations and mark the fifth consecutive monthly gain in the CPI on the back of rising energy prices and housing costs.

Rising energy costs are one of the main components contributing to this recent rise in consumer prices as a recovery in the price of crude oil also pushes up the cost of gasoline. Data from the US Energy Information Administration (EIA) shows that the average retail price for a gallon of gasoline is up around $0.30 as of the end of December 2016 compared to a year ago. The EIA also says that crude oil makes up about half of the price of a gallon of regular gasoline. December CPI for all items less food and energy rose, also known as core inflation, rose 2.2% year-on-year.

Rising Prices Means More Fed Rate Hikes

Many economists expect that the Federal Reserve will need to respond to the rising trend of inflation with a series of interest rate hikes in 2017. Chairwoman of the Federal Reserve, Janet Yellen, said in a speech on Wednesday that after more than a decade of benefiting from historically aggressive easing measures, the US economy is "close" to the Fed's objectives, implying there is scope for higher US interest rates.

According to Bloomberg, “Federal Reserve policy makers considering further interest-rate increases will be encouraged by the broad-based advance in the cost of living, which signals inflation is moving toward their 2 percent goal...” Fed Funds Futures contracts are currently pricing in nearly a 50% probability that the Fed will raise rates at least once by June 2017.

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice.

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