WASHINGTON (Reuters) - U.S. consumer prices recorded their biggest increase in eight months in September as gasoline prices soared in the wake of hurricane-related production disruptions at oil refineries in the Gulf Coast, but underlying inflation remained muted.

FILE PHOTO: Customers shop at a Whole Foods store in New York City, U.S., August 28, 2017. REUTERS/Brendan McDermid/File Photo

The mixed report from the Labor Department on Friday comes as Federal Reserve officials have been engaged in a vigorous debate on the inflation path and suggests a December interest rate increase is not a done deal.

Prices for U.S. Treasuries rose and stocks on Wall Street hit record highs. The dollar was little changed against a basket of currencies. Policymakers could, however, find solace in another report indicating that the economy was swiftly recovering from the damage inflicted by Hurricanes Harvey and Irma, with a strong rebound in retail sales last month.

“The firmness in retail sales should override the enduring mystery of low inflation to spur a December Fed rate hike,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The Labor Department said its Consumer Price Index increased 0.5 percent last month after advancing 0.4 percent in August. The rise was the biggest since January and lifted the year-on-year gain in the CPI to 2.2 percent from 1.9 percent in August.

Gasoline prices surged 13.1 percent last month, accounting for 75 percent of the increase in the CPI. The jump in gasoline prices was the largest since June 2009 and followed a 6.3 percent gain in August.

The Labor Department said Harvey was reported to have impacted refinery capacity in the Gulf Coast and was likely a factor in last month’s increase in gasoline prices.

Outside gasoline, price pressures were benign. Excluding the volatile food and energy components, consumer prices ticked up 0.1 percent as the increase in rental accommodation slowed and the cost of new motor vehicles, furniture and medical care declined. The so-called core CPI rose 0.2 percent in August.

In the 12 months through September, the core CPI increased 1.7 percent. The year-on-year core CPI has now advanced by the same margin for five consecutive months.

The Fed tracks the personal consumption expenditures price index excluding food and energy, which has consistently undershot the U.S. central bank’s 2 percent target for more than five years. Fed Chair Janet Yellen has said that temporary factors such as one-off price cuts by wireless telephone companies are holding back inflation.

Minutes of the Fed’s Sept. 19-20 meeting published on Wednesday showed “many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent.”

INFLATION EXPECTATIONS SLIP

Adding to the debate, the University of Michigan’s survey of consumers showed consumer’s inflation expectations over the medium term slipped in early October.

While the Fed could still increase borrowing costs in December for a third time this year, it would probably be hard for the central bank to push through the three rate hikes it has forecast for 2008, if the slow inflation trend persists.

Last month, food prices rose 0.1 percent after a similar gain in August. Owners’ equivalent rent of primary residence rose 0.2 percent after advancing 0.3 percent in August. Prices for new motor vehicles fell 0.4 percent as manufacturers resort to deep discounting to eliminate an inventory overhang.

There were also decreases in the cost of medical care, apparel, and household furnishings. But the cost of mobile phone services rose 0.4 percent after 14 straight months of declines.

In a separate report on Friday, the Commerce Department said retail sales jumped 1.6 percent in September likely as reconstruction and clean-up efforts in areas devastated by Harvey and Irma boosted demand for building materials and motor vehicles.

Retail sales were also buoyed by a surge in receipts at service stations, which reflected higher gasoline prices. Last month’s increase in retail sales was the largest since March 2015.

Excluding automobiles, gasoline, building materials and food services, retail sales increased 0.4 percent last month after being unchanged in August. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

The pick-up in core retail sales suggests the drag on the economy from the hurricanes will probably be modest. The growth outlook was boosted by another report from the Commerce Department showing inventories recorded their biggest gain in nine months in August.

Economists estimate the storms could subtract at least six-tenths of a percentage point from third-quarter GDP growth.

The economy grew at a 3.1 percent annualized rate in the April-June period. The Atlanta Fed raised its third-quarter GDP growth estimate by two-tenths of a percentage point to a 2.7 percent pace after the data.

“The sudden increase in retail demand is likely to cause third-quarter growth to come in somewhat better than expected before the hurricanes hit,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.