Inflation Up, Business Conditions Improve By Kristin Roberts WASHINGTON (Reuters) - U.S. inflation rose strongly in January while business conditions in the Midwest and New York City improved, according to data released Monday that bolstered expectations of U.S. interest rate hikes. Separately, new home sales tumbled last month as housing began to show signs of weakness after serving as a critical support to the U.S. economic expansion over the past year. The Commerce Department said personal income fell 2.3 percent in January after hitting a record in December on a big dividend payout by Microsoft Corp. Excluding that one-time impact and other factors, personal income rose 0.5 percent in January compared with a 0.6 percent gain in December. While the income and spending figures were largely in line with expectations, the report showed a larger-than-expected rise in a measure of inflation favored by Federal Reserve Chairman Alan Greenspan. "I would point to the core PCE deflator, which gave a modest upside surprise. This is the Fed's preferred measure of inflation ... and might have markets pricing in a more aggressive Fed," said Lara Rhame, foreign exchange strategist at Credit Suisse First Boston, New York. The price index for consumer spending gained 0.2 percent in January and rose 0.3 percent with volatile food and energy prices stripped out. That was a sharp pickup from December's flat readings and marked the biggest monthly increase in core prices since October 2001. In the first read for 2005 on core PCE inflation, core prices increased 1.6 percent on a year-over-year basis -- matching the fourth-quarter pace posted in Friday's gross domestic product report. U.S. Treasury bond prices fell after the data with the benchmark 10-year note falling 4/32, pushing the yield up to 4.28 percent from 4.27 percent on Friday. The Fed has raised rates six times since last June to head off inflation concerns, and has said it should be able to continue to increase borrowing costs at a "measured" pace. Most analysts believe that implies quarter-percentage point rate hikes and markets are watching for data that could push policy-makers to be more aggressive. But some economists said Monday's inflation reading was still benign. "It's still in the comfort zone of the Fed," said Anthony Chan, senior economist at J.P. Morgan Fleming Asset Management in Columbus, Ohio. "There's nothing in the report for the Fed to raise rates faster."     Continued ... Quelle "Inflation Up, Business Conditions Improve" : reuters.com Main page for "Inflation Up, Business Conditions Improve"