y Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices increased more than expected in August as rising rents and healthcare costs offset a drop in gasoline prices, pointing to a steady build-up of inflation that could allow the Federal Reserve to raise interest rates this year.

The Labor Department said on Friday its Consumer Price Index rose 0.2 percent last month after being unchanged in July. In the 12 months through August, the CPI increased 1.1 percent after advancing 0.8 percent in July.

The so-called core CPI, which strips out food and energy costs, rose 0.3 percent last month, the biggest increase since February, after gaining 0.1 percent in July.

Economists had forecast the CPI nudging up 0.1 percent last month and the core CPI gaining 0.2 percent. The core CPI increased 2.3 percent in the 12 months through August after rising 2.2 percent in the year through July.

U.S. Treasury prices pared gains and U.S. stock futures extended losses after the data. The dollar was stronger against a basket of currencies.

Last month’s uptick in inflation is likely to be welcomed by Fed officials when they meet next Tuesday and Wednesday to deliberate on monetary policy.

But against the backdrop of a raft of disappointing economic reports for August, including weak retail sales and industrial production, as well as a slowdown in job growth, the U.S. central bank is expected to leave interest rates unchanged.

The Fed has a 2 percent inflation target and tracks an inflation measure which has been stuck at 1.6 percent since March. Fed Governor Lael Brainard said on Monday she wanted to see stronger consumer spending data and signs of rising inflation before hiking rates.

The U.S. central bank raised its benchmark overnight interest rate at the end of last year for the first time in nearly a decade, but has held it steady since amid concerns over persistently low inflation.

Financial markets have virtually priced out a rate increase next week and many economists expect the Fed to raise borrowing costs in December.

In August, gasoline prices fell 0.9 percent after sliding 4.7 percent in July. Food prices were unchanged, with the cost of food consumed at home declining for a fourth straight month.

Within the core CPI basket, housing and medical costs continued their upward march. Owners’ equivalent rent of primary residence rose 0.3 percent in August. It has risen by the same margin every month since April.

Medical care costs jumped 1.0 percent last month, the largest increase since February 1984, after advancing 0.5 percent in July. The cost of hospital services surged 1.7 percent, the biggest gain since October 2015. Prices for prescription medicine soared 1.3 percent.

Americans also paid more for motor vehicle insurance and apparel. Prices for tobacco also rose, but the cost of used cars and trucks fell for a sixth straight month.

(Reporting by Lucia Mutikani; Editing by Paul Simao)