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Consumer prices rise 0.4%

Washington_Consumer prices rose in February by the largest amount in seven months as gasoline prices surged again and clothing costs jumped the most in nearly two decades.

But the increase appeared to ease many economists' concerns about dangerous price movements in either direction. The recession is expected to dampen any inflation pressures for at least the rest of this year, while the slight uptick in prices over the last two months also has made the possibility of deflation more remote.

The Labor Department reported Wednesday that consumer inflation rose 0.4 percent in February, the biggest one-month jump since a 0.7 percent rise in July. Two-thirds of last month's increase, which was slightly more than analysts expected, reflected a big jump in gasoline pump prices.

Meanwhile, the deficit in the broadest measure of U.S. trade fell sharply in the final three months of last year as oil prices dropped and the recession reduced U.S. consumers' demand for overseas goods. Economists expect the improvement in the U.S. current account to continue this year, but mostly due to rapid falls in imports.

Exports also are falling as the global economy slows, eliminating what had been a crucial source of sales for U.S. manufacturers early last year.

Core inflation, which excludes food and energy, rose 0.2 percent in February, also slightly higher than the 0.1 percent rise economists expected.

The Federal Reserve, which was wrapping up a two-day meeting on Wednesday, was expected to keep a key interest rate at a record low near zero as Fed officials continue to believe that the biggest problems at present are the deep recession and severe financial crisis, not inflation.

Indeed, Fed officials have expressed concerns about the opposite problem, that a deepening recession and prolonged housing slump could push the country into a period of deflation, something not experienced in the U.S. since the Great Depression.

Falling prices may sound good to consumers, but can actually make a recession even worse by dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.

"Consumer inflation in the first two months of the year is starting to look more normal than the extremely depressed numbers that printed in the fourth quarter of last year," Michael Feroli, economist at JPMorgan Economics, wrote in a research note. "The last two readings on core inflation have almost certainly given the Fed some comfort, easing fears that last quarters figures presaged a quick slide into deflation."

Still, Jay Bryson, global economist for Wachovia Corp., said prices will remain under pressure for the next year or more as unemployment increases and consumer spending stays sluggish. That could prompt businesses to cut prices in an effort to spur sales.

"I don't think we're out of the deflationary woods at this point," he said.

Over the past 12 months, consumer prices have risen just 0.2 percent. That was up slightly from a reading of zero for the 12 months ending in January, which had been the smallest annual change in more than a half-century.

On Wall Street, where stocks had their fifth advance in six days Tuesday, investors gave up some gains as they awaited the conclusion of the Fed meeting. The Dow Jones industrial average fell about 60 points, while broader indicators were mixed Wednesday afternoon.

Gas prices surged 8.3 percent last month after a 6 percent rise in January. Both gains came after several months of huge declines in prices at the pump.

Total energy costs rose 3.3 percent in February, almost double the 1.7 percent January rise. But energy prices are still down 18.5 percent from a year ago. Home heating oil and natural gas prices both fell in February.

Clothing costs shot up 1.3 percent in February, the biggest one-month rise since a 1.5 percent increase in March 1990. The gain likely reflected a rebound from steep discounts offered in January as retailers were clearing store shelves after the worst holiday season in decades.

Food costs dipped 0.1 percent last month but are still up 4.7 percent over the past year. Prices for meat and dairy products fell, while fruits and vegetables rose, according to the Labor Department report.

General Mills Inc. said Wednesday that its profit fell 33 percent in the quarter ending Feb. 22, partly due to higher costs compared to a year ago for commodities like corn and fuel oil.

Airline fares fell 2.6 percent last month, the biggest drop since November, but new car prices rose 0.8 percent.

Elsewhere, the Commerce Department reported Wednesday that the current account deficit, which includes investment flows and other transfers as well as trade, fell to $132.8 billion in the final quarter of last year from a revised $181.3 billion in the third quarter. That was the lowest since the fourth quarter of 2003 and below what analysts expected. The deficit dropped 7.9 percent to $673.3 billion last year.

The U.S. finances the deficit by borrowing from foreigners, so a smaller deficit reduces the need for such borrowing. The current account deficit increased for five straight years before falling slightly in 2007.

The report on consumer prices followed a report Tuesday that inflation at the wholesale level rose a slight 0.1 percent in February.

Only last summer, officials at the Fed had started to worry that a surge in energy costs could spread to other areas of the economy and boost inflation to unacceptable levels. But after the financial crisis struck in the fall, the Fed switched signals and is now aggressively fighting a deepening recession.

Inflation is not expected be a problem for some time to come given the prolonged recession, which is already the longest downturn in a quarter-century.

_____

AP Economics Writer Christopher S. Rugaber contributed to this report.

Martin Crutsinger, AP Writer COPYRIGHT 2009 BY THE ASSOCIATED PRESS. ALL RIGHTS RESERVED

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