Nov. 15 (Bloomberg) -- U.S. inflation last month continued to accelerate at a pace that may limit the Federal Reserve's room to cut interest rates in 2008.

Consumer prices rose 0.3 percent in October, the Labor Department said today in Washington, matching economists' forecasts. Prices were 3.5 percent higher than a year earlier, the biggest 12-month increase since August 2006.

``There are no alarm bells going off today, but neither does it provide any wiggle room to cut rates,'' said Julia Coronado, a senior economist at Barclays Capital Inc. in New York, who correctly forecast the figures. Policy makers ``have to take the inflation threat seriously.''

Futures traders are almost certain the Fed will reduce its benchmark rate again in December, even though the central bank said on Oct. 31 that the risk of faster inflation and slacker growth are ``roughly'' equal. Crude oil prices punched through $90 a barrel in October and kept rallying this month, threatening to boost inflation and slow an economy already weakened by the housing recession and credit collapse.

Compared with 12 months ago, ``prices are uncomfortably high for the Fed,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ``It has to raise the question about the limits of how much the Fed will cut rates.''

The increase in total prices from September matched the median forecast of 79 economists in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 0.5 percent. Excluding fuel and food, prices advanced 0.2 percent for a fifth month, also meeting the median prediction.

Jobless Claims

Separate numbers from the Labor Department showed first- time claims for jobless benefits climbed more than forecast last week. The Fed's New York and Philadelphia branches said manufacturing grew at a faster pace than predicted.

First-time claims for jobless benefits rose 20,000 to 339,000 last week. The figures are consistent with a slowing job market, economists said.

Treasury notes remained higher after the reports. The yield on the benchmark 10-year note fell to 4.22 percent at 12:06 p.m. in New York, from 4.25 percent late yesterday. The dollar was little changed, and stocks retreated after J.C. Penney Co. and Applied Materials Inc. forecast profit below analysts' estimates.

The year-on-year increase in prices was up from a 2.8 percent rate in September. Consumer prices excluding food and energy rose 2.2 percent in the 12 months through October, compared with a 2.1 percent increase the previous month. It rose for the first time since January.

Annual Increase

So far this year, prices are rising at a 3.6 percent rate, compared with a 2.4 percent rate through the first 10 months of 2006. Core prices are rising at a 2.3 percent pace, compared with a 2.8 percent pace in the same period a year earlier.

Today's report showed energy prices climbed 1.4 percent, the most since May. Gasoline prices also increased 1.4 percent and electricity costs rose 1.5 percent, the most since January.

Crude oil futures on the New York Mercantile Exchange averaged $85.26 a barrel in October, up from $79.63 in September, and rose to a record $98.62 on Nov. 7. The price of regular gasoline at the pump exceeded $3 a gallon this month for the first time since July, according to AAA.

The cost of fuel is prompting some businesses to increase prices. Airlines have raised fares seven times since Sept. 1, and all five of the biggest U.S. carriers last week added a $10 round-trip fuel surcharge to ticket prices. Today's report showed airfares jumped 1.6 percent in October.

Airline Fares

``Since fuel prices affect airlines across the board, consumers should expect prices to continue to increase,'' Rick Seaney, chief executive officer of Dallas-based FareCompare.com, said in an e-mailed statement Nov. 9.

Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.5 percent increase in September.

Rent increases slowed last month, the report showed. The cooling may reflect the worst housing recession in 16 years, economists said.

Medical-care costs jumped 0.6 percent after increasing 0.3 percent. Clothing prices were little changed and auto prices fell.

Almost 60 percent of the CPI covers prices that consumers pay for services ranging from airline fares to movie tickets and laundry charges.

Fed Chairman Ben S. Bernanke said in Nov. 8 congressional testimony that high commodity prices and a weaker dollar may stoke inflation ``for a time.'' He also warned that economic growth is likely to slow this quarter and that energy costs may undercut spending.

Rate Cuts

Central bankers cut their benchmark rate 0.75 percentage point to 4.5 percent over their last two meetings. Trading in fed funds futures shows investors project the central bank will cut its benchmark lending rate again next month by a quarter point.

Still, the impact of rising energy costs on other prices has so far been limited. Competition for business in a slowing economy is helping keep a lid on inflation, economists said.

Wal-Mart Stores Inc. marked down 15,000 holiday items, 20 percent more than last year, and started discounting toys in the beginning of October, more than two weeks earlier than in 2006. The strategy was aimed at taking customers away from Target Corp. and Kroger Co. as Americans grapple with the housing slump and high-cost fuel.

The CPI is the government's broadest gauge of costs because it includes goods and services. A report yesterday from the Labor Department showed wholesale prices rose 0.1 percent in October, less than forecast. Excluding food and fuel, producer prices were unchanged.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: November 15, 2007 12:08 EST