U.S. inflation rises, trade gap shrinks sharply

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. inflation rose in February on higher gasoline and apparel prices, government data showed on Wednesday, indicating some pricing power in the recession-hit economy and easing fears of deflation for now.

In another snapshot of the U.S. economy, the country's current account deficit for the fourth quarter contracted sharply as imports fell more rapidly than exports.

But it was the Labor Department's Consumer Price Index that attracted the most attention. Analysts said that while the CPI data showed the risk of a persistent, broad decline in prices was fading, it did not indicate a resurgence of inflation, given the deep slump the economy is in.

In February, the overall CPI rose 0.4 percent, the biggest monthly gain since last July, and above January's gain of 0.3 percent.

"Kiss the idea of deflation goodbye. The brief foray into declining consumer prices over the winter seems to be over and done with," said Howard Simons, strategist at Bianco Research in Chicago.

About two-thirds of the rise in February's inflation rate came from the 8.3 percent jump in gasoline prices.

Compared with a year ago, consumer prices rose 0.2 percent after being flat in January. Core CPI, which excludes volatile food and energy prices, gained 0.2 percent in February, after rising at the same rate the prior month.

The Federal Reserve's announcement that it would buy up to $300 billion worth of long-term U.S. Treasuries to keep interest rates low and help revive an economy now in its 15th month of recession ignited a brisk rally in U.S. stocks and the prices of government bonds. Major U.S. stock indexes ended the session with gains of about 1 percent to 2 percent.

This will be the first time since the period from 1961 to 1965 that the Fed has bought longer-term U.S. Treasury securities.

The yield on the benchmark 10-year U.S. Treasury note had its biggest one-day drop since the stock market crash in October 1987. In late afternoon, the 10-year note's price was up 14/32, while its yield had tumbled to 2.51 percent from 3.01 percent at Tuesday's close.

But the U.S. dollar sank to a two-year low versus the euro.

Analysts said the Fed's latest move effectively left real interest rates negative across the board. The Fed kept the target for its benchmark overnight fed funds rate unchanged in a zero to 0.25 percent range.

APPAREL AND NEW VEHICLE PRICES JUMP

The February CPI data showed apparel prices up 1.3 percent, the biggest rise since a 1.5 percent gain in March 1990. Also contributing to the increase in the core inflation rate were new vehicle prices, up 0.8 percent, the largest advance since November 2004.

Compared with a year ago, core CPI rose 1.8 percent, creeping up from 1.7 percent in January, but still below the Fed's comfort zone of 2 percent.