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 Commerce Department said the U.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, above the forecast for an increase of 0.1 percent.
U.S. stocks were mixed, with the Dow industrials down with oil prices and some energy companies' shares. The Nasdaq composite index rose on a report that IBM was in talks to buy computer maker Sun Microsystems.
In contrast, U.S. government bond prices benefited from mostly lower stock indexes as investors made a safe-haven bid for Treasuries. The U.S. dollar was down against major currencies before the Federal Reserve's announcement this afternoon that may include more steps to stimulate the economy.
The Fed is expected to leave the target for its benchmark overnight fed funds rate unchanged in the range of zero to 0.25 percent.
But the statement accompanying the Fed's decision will be watched for indications on whether the central bank will start buying Treasuries to damp down interest rates and help revive an economy in recession since December 2007.
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.
Some analysts believe these gains in inflation were unlikely to be sustained, considering the economic slump and the accompanying surge in unemployment that is undermining consumer demand. They still see deflation as a risk.
"Even with energy prices having flattened out, the deflation risk is real," said David Greenlaw, an economist at Morgan Stanley in New York.
"Unless there is a powerful V-shaped recovery, which we deem highly unlikely, it is going to be several years before there is any legitimate reason to be concerned about a resumption of inflation risk."
Deflation is a broad-based decline in prices that can undercut an economy by leading consumers to hold off purchases in the hopes of even lower prices.
But some economists argue that the Fed's liquidity injections are expanding the money supply base and may ignite inflation going forward if the central bank does not deploy adequate measures to withdraw that money from the system once the economy recovers.
"The shoveling of money into the system eventually can start to push prices higher," said Bianco Research's Simons.
"Once the economy recovers, we will have some real problems because at that point, the banking system will start to turn this monetary base into credit and will lead to an explosion of money supply."
IMPORTS AND MORTGAGE RATES FALL
The U.S. current account deficit for the fourth quarter contracted sharply to $132.8 billion -- the smallest since 2003's final quarter -- from $181.3 billion in the third quarter of 2008.
The current account, which covers goods, services and income transfers, is the broadest measure of total U.S. trade with the rest of the world.
The anemic U.S. economy was reflected in slumping domestic demand, which is crimping the appetite for imports. In last year's fourth quarter, imports of goods fell to $464.6 billion from $562.5 billion in the third quarter of 2008, the Commerce Department said.
The fourth-quarter current account deficit equaled 3.7 percent of gross domestic product, down from 5.0 percent in the third quarter, and the lowest since 3.4 percent in 2001's fourth quarter.
Earlier on Wednesday, the Mortgage Bankers Association reported that U.S. mortgage applications surged in the latest week, driven by a spike in demand for refinancing as the average rate on a 30-year fixed-rate home loan fell to 4.89 percent, matching a record low.
(Additional reporting by Doug Palmer in Washington and Lynn Adler in New York; Editing by Jan Paschal)