U.S. core inflation rose in March to its highest level since November of 2001 as prices for clothing and hotel rooms soared.

The Consumer Price Index rose 0.5% in March, up from a 0.3% increase in February, the Labor Department said this morning.

The closely watched core index, which excludes food and energy items, rose 0.4%, its biggest increase since November 2001. The core index rose 0.2% in February. In annual terms, the core rate rose to 1.6% for the 12 months that ended March, up from 1.2% for the 12 months ended in February.

Economists had called for 0.3% gain in the overall index and a 0.2% increase in the core index.

The news may further fan fears that the Federal Reserve will raise interest rates later this year.

In March, energy prices rose by 1.9%, following a 1.7% advance. The increase in energy prices last month reflected a 5.5% jump in gasoline prices.

Strong demand and tight supplies have pushed up energy prices. Looking ahead, analysts believe prices could climb higher, especially in light of a recent decision by the Organization of Petroleum Exporting Countries to cut its oil output target.

Airfare prices rose by 1.1% in March and clothing prices increased 0.9%.

Food prices increased by 0.2% for the second month in a row.

“Today’s higher-than-expected U.S. CPI report is a major problem for bonds, especially following yesterday’s stronger-than-expected retail sales report,” says BMO Nesbitt Burns.

“The market has been underestimating the degree of U.S. economic vigour, inflation pressure and, in consequence, the degree to which the Fed might be tightening sooner rather than later. Yesterday’s sharp sell-off in the U.S. bond market reflected a re-pricing of inflation/Fed-rate-hike risk, and given today’s CPI figures, the trend for U.S. bonds would seem to be for more down days than up ones during the weeks ahead. In turn, this points to the combination of higher yields and narrower Canada-U.S. spreads along the Canadian curve,” Nesbitt notes.

“The data send a strong message that disinflationary pressures have bottomed out in the U.S. economy and solidify the case for the Fed to begin rebalancing monetary policy this August,” TD Bank says. “We remain of the view that the first rate hike will come this August.”