U.S. inflation tame, but Fed may still trim bond buying

* Consumer price index flat in November

* Year-on-year CPI (Other OTC: CPICQ - news) rises 1.2 percent

* Core CPI rises 0.2 percent, up 1.7 percent from year-ago

* Weak inflation belies signs of economic vigor elsewhere

By Lucia Mutikani

WASHINGTON, Dec 17 (Reuters) - U.S. consumer prices were

flat in November, but the lack of inflation pressures in the

economy will probably not stop the Federal Reserve from scaling

back its bond-buying program soon.

The Labor Department said on Tuesday its Consumer Price

Index was restrained last month by declines in gasoline and

natural gas prices. It had slipped 0.1 percent in October.

The low inflation environment comes against the backdrop of

an improving economic outlook, which economists say will

embolden the U.S. central bank to take a step towards

normalizing monetary policy at least by March.

"If the Fed wanted an excuse to continue with the full bond

purchases they could use the inflation numbers," said Gus

Faucher, a senior economist at PNC Financial Services (NYSE: PNC-WT - news) in

Pittsburgh. "But given the strength in we have seen in the labor

market and in other economic indicators, I think they do want to

reduce their purchases."

The inflation report was released as Fed officials prepared

to start a two-day policy meeting. The central bank will weigh

an array of data from employment and retail sales to industrial

production that have suggested the economy is on an upswing.

A separate report on Tuesday that showed confidence among

homebuilders increased in December bolstered that view. It

suggested housing will continue to lend support to the economy

despite higher mortgage rates.

Some economists expect the Fed to announce a reduction in

its $85 billion monthly bond buying program at the end of its

meeting on Wednesday, although more believe it will wait until

January or March.

When it does move, persistently low inflation would likely

lead it to act cautiously before beginning to raise overnight

interest rates, which have been held near zero since late-2008.

"Even after the Fed starts to reduce its bond purchases,

policy will be extraordinarily easy," said Jay Morelock, an

economist at FTN Financial in New York.

HOUSING SHOWS SOME INFLATION

U.S. financial markets were little moved by the data as

investors awaited the outcome of the Fed meeting.

In the 12 months through November, the CPI rose 1.2 percent.

It had increased 1.0 percent in October, the smallest advance

since October 2009.

Stripping out the volatile energy and food components, the

so-called core CPI rose 0.2 percent after rising by 0.1 percent

for three consecutive months.

That left its increase over the past 12 months at 1.7

percent, where it has now been for three straight months.

The Fed targets 2 percent inflation, although it tracks a

gauge that tends to run a bit below the CPI.

A 1.6 percent drop in gasoline prices and a 1.8 percent fall

in the cost of natural gas last month offset increases in

electricity, keeping inflation subdued.

Food prices rose marginally.

Tame inflation is giving consumer purchasing power a lift.

Adjusted for inflation, average hourly earnings increased 0.2

percent in November after edging up 0.1 percent the prior month.

Within the core CPI, apparel prices fell for a third

straight month, reflecting discounts offered by retailers to

lure shoppers and reduce inventory.

There were, however, gains in rent. Owners' equivalent rent

of residences, or OER, which accounts for about a third of the

CPI, posted its biggest monthly gain in five years, and was up

2.4 percent from a year ago. It was the biggest year-on-year

gain since September 2008.

"We remain of the view that OER, and shelter costs more

generally, will continue to be the main driver of core inflation

during 2014," said Peter Newland, a senior economist at Barclays (Dusseldorf: BCY.DU - news)

in New York.

Medical care costs were flat, while prices for new vehicles

fell for a second straight month.