Consumer prices flat but confidence dips

WASHINGTON (Reuters) - Cheaper gasoline and food helped keep U.S. consumer prices in check during February, the government said on Friday, but a gauge of consumer hopes showed growing fear of rising prices in a slowing economy.

The U.S. Labor Department said the Consumer Price Index, the most widely used inflation gauge, was unchanged last month after rising 0.4 percent in January.

It was the first unchanged index reading since August. The closely watched core index, which excludes volatile food and energy items, also held steady.

Analysts were skeptical about the prices report from the beginning, especially its decline in energy prices when prices at the pump are steadily climbing, and that was borne out in a later Reuters/University of Michigan Surveys of Consumers.

The confidence index slipped to 70.5 in early March from the final February reading of 70.8. Economists polled by Reuters had predicted a lower figure of 69.0.

"There was nearly unanimous agreement among consumers that the economy was now in recession," said Richard Curtin, director of the survey, in a statement. Even worse, consumers' expectations for inflation one year ahead, at 4.5 percent, were up sharply from February's 3.6 percent.

STOCKS TUMBLE AGAIN

U.S. stock prices ended sharply lower as investors digested news that JPMorgan Chase and the New York Federal Reserve Bank were providing financing to Bear Stearns. The Dow Jones industrial average .DJI fell 194.65 points to 11,951.09 and the Nasdaq Composite Index .IXIC lost 51.12 points to 2,212.49.

In a speech to the Economic Club of New York, President George W. Bush said the country faces "tough times" but said he was confident about the economy's long-term strength. Bush, who leaves office next January, did not specify when he expected the long-term strength to become apparent.

The president of the National Bureau of Economic Research, which is the official arbiter of the U.S. business cycle, said on Friday the U.S. was in a recession that may become severe.

"The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," Martin Feldstein told the Futures Industry Association in Boca Raton, Florida.

The inflation report led futures markets to predict Federal Reserve policy-makers will feel more comfortable lowering interest rates sharply when they meet on Tuesday to spur an economy that may already be in recession.

"This is a huge ... surprise," said Ken Landon, a foreign exchange strategist with JPMorgan Chase in New York. "This gives further support for the Fed to cut rate more aggressively.

The U.S. central bank has cut its benchmark interest rate to 3.0 percent from 5.25 percent since mid-September and markets now look for another three-quarters of a percentage point reduction next week.

In the 12-month period through February, consumer prices rose 4.0 percent, a moderation from the 4.3 percent gain registered in January, and the smallest year-over-year increase since last October. The year-on-year reading for core prices slipped to a rise of 2.3 percent from 2.5 percent.

RATE CUTS COMING

Analysts questioned whether inflation was truly easing, but still said it created breathing room for the Fed to lower interest rates sharply to stimulate the economy.

"You got a decrease in energy prices, which obviously is fluky and won't last; you got a deceleration in some food items, which isn't going to last and there was a deceleration in shelter," commented Michael Darda, an economist with MKM Partners LLC.

"I doubt it will last."

Similarly, the co-director of the Washington-based center for Economic and Policy Research, Dean Baker, said there was ample evidence that a falling U.S. dollar was helping foster price rises throughout the economy.

"Import prices continue to rise across the board, from almost all countries and all types of goods and services," Baker said. A cheaper dollar makes imports more costly.

Gasoline prices moderated in February but have since risen higher, hitting a record $3.23 a gallon in the latest week, according to the Energy Department, which said prices could hit $4 a gallon by spring in some areas.

The tame inflation performance was sharply in contrast to Wall Street economists' forecasts that overall prices would rise 0.3 percent and core prices would be up 0.2 percent.

Energy prices fell 0.5 percent in February, the department said, a sharp reversal from January's 0.7 percent gain and the first decline since August. Gasoline prices fell 2 percent after a 1.2 percent rise in January.

The cost of new vehicles fell 0.3 percent, while apparel prices also dropped 0.3 percent. Several other categories of goods and services posted smaller prices rises than in January.

(Reporting by Glenn Somerville)