By Kate Davidson

Inflation is finally showing signs of behaving the way Federal Reserve officials want it to, bolstering the case for them to raise short-term interest rates next month.

They decided Wednesday to leave rates unchanged while sending new signals that they could move at their next meeting, Dec. 13-14.

Inflation has "increased somewhat since earlier this year," Fed officials said in a statement released after a two-day policy meeting, noting also that some investors' expectations of future inflation "have moved up but remain low."

Officials also said they wanted to see "some further evidence" of economic progress before raising rates, a suggestion that the bar for lifting them has been lowered.

"We fully expect this evidence to emerge over the next six weeks," said Ian Shepherdson, chief economist at Pantheon Macroeconomics, "so only a shock -- the election of [Donald] Trump or an external geopolitical or market event -- can now prevent a December hike."

The Fed has left its benchmark federal-funds rate unchanged since December in a range between 0.25% and 0.5%. Officials started 2016 expecting to raise it by a full percentage point this year but held off because of worries about a variety of risks, including weak economic growth earlier in the year and market turmoil abroad.

While most Fed officials agree the labor market has improved significantly over the past year, inflation has run below their 2% target for more than four years, providing little urgency for raising rates.

Recent data suggest that may be starting to shift. So-called core inflation, which excludes volatile food andenergy prices, rose 1.7% in the third quarter from a year earlier, according to the personal-consumption-expenditures price index, the central bank's preferred inflation gauge.

A measure of investors' expected annual price increases over the next 10 years hit its highest level in more than a year. Policy makers pay close attention to inflation expectations because they can influence firms' and households' spending decisions, which affect actual prices.

The Fed nodded to these gains and dropped language it had used in previous statements that it expected inflation "to remain low in the near term."

The Fed's new assessment suggests officials are more confident inflation is moving toward their 2% goal -- setting the stage for an increase in December -- but aren't worried that it is rising too quickly.

The Fed's policy committee "judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives," it said.

Officials used similar language in their September statement but on Wednesday added the word "some" to indicate how much more evidence they need to see before moving. The word suggests they don't need to see much more to raise rates.

The committee voted 8-2 to hold rates steady. Kansas City Fed President Esther George and Cleveland Fed President Loretta Mester dissented, saying they would have preferred to raise the fed-funds rate by a quarter percentage point.

Economic data released since the Fed's September meeting show the labor market has continued to make progress, while economic growth has rebounded after a weak first half of the year.

Employers added 156,000 jobs in September and the unemployment rate rose a tenth of a percentage point to 5% because the share of Americans seeking jobs continued to edge up, the Labor Department said. It is set to release its October employment report Friday.

The economy grew at a 2.9% annual rate in the third quarter, up from 1.4% in the second quarter, the Commerce Department reported last week.

Consumer confidence dipped last month after soaring over the summer, but consumer spending remained on track. Business investment, while still modest, picked up in the third quarter.

The decision to stand pat despite a stronger case for moving reflected some Fed officials' concerns about the potential market turbulence that could stem from the U.S. presidential election on Tuesday.

Wednesday's statement "carries enough room for the Fed to wriggle out come December if economic and financial conditions change" following the election, said Luke Bartholomew of Aberdeen Asset Management.

Write to Kate Davidson at kate.davidson@wsj.com

(END) Dow Jones Newswires

November 02, 2016 19:49 ET(23:49 GMT)

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