Shoppers look over shoes on sale at a Macy's store in New York, NY, U.S. on November 23, 2012.
Excluding food and energy, the so-called core consumer price index increased 1.8 percent from a year earlier after a 1.7 percent advance, including a 0.3 percent monthly gain that topped analyst projections and was the most in nearly a year.
Consumer inflation slowed in December to a tiny 0.1 percent gain as the cost of energy products tumbled following a big jump in November.
But energy prices fell 1.2 percent in December due mainly to a 2.7 percent decline in the cost of gasoline relative to November.
Weak import and producer price reports this week had raised concerns about the inflation outlook, although the two reports do not have a strong correlation with the CPI data.
After coming in below the Fed's target for years, U.S. inflation appears to have rebounded in the US. The measure excluding food and energy is also below their target.More news: Ecuador's Foreign Ministry: Assange granted Ecuadorian citizenship
The dollar fell to a session low against a basket of currencies after the data.
The rise in the inflation will lead to a spike in bond yields. United States stock index futures pared gains.
The Index of Industrial Production (IIP) data published by the ministry of statistics and programme implementation (Mospi) shows that factory output had shot up to 25-month high of 8.4% in November after a tepid growth of 2% (revised from earlier 2.2%) in the month before. The cost of medical care increased 0.3%, with prices for prescription medication surging 1% after rising 0.6% in November. It increased borrowing costs three times in 2017. In the same month previous year, growth was 1.5 percent.
Apparel prices, however, fell 0.5 per cent. "The uptick in the CPI inflation to a 17-month high in December 2017 validates the caution displayed by the Monetary Policy Committee (MPC) in its recent reviews", said Aditi Nayar, principal economist of Icra.
After maintaining a benchmark policy rate at a record low near zero for seven years, the Fed started gradually raising rates modestly - once in December 2015 and again in December 2016. Owners' equivalent rent of primary residence climbed 0.3% after gaining 0.2% in November. The statistical impact of an unfavorable base also rose the year-on-year print. Sales at auto dealerships rose 0.2 per cent. The so-called core PPI increased 0.4 percent in November.
Reacting to the data, industry body CII said that November IIP numbers reflected "the economic revival taking place across sectors".