Consumer prices rose the most in 10 months in February as the cost of gasoline spiked, but there was little sign that underlying inflation pressures were building up.

Surging gasoline prices put a small dent in consumer confidence early this month, other data showed on Friday. Still, Americans do not believe the sharp run-up in prices will last.

The Labor Department said the Consumer Price Index rose 0.4 percent in February after advancing 0.2 percent in January. Gasoline accounted for more than 80 percent of the rise.

Stripping out volatile food and energy costs, the so-called core CPI edged up just 0.1 percent.

Consumer purchasing power, at least for the next few months, is going to remain pressured by rising gasoline prices, said Sam Bullard, a senior economist at Well Fargo Securities in Charlotte, North Carolina. However, he said a trend toward lower inflation was still in place.

Consumer prices rose 2.9 percent last month from a year-ago, unchanged from January but down from a peak of 3.9 percent in September. The core index was up 2.2 percent over the 12 months through February, slowing from 2.3 percent in January.

The Federal Reserve said on Tuesday the recent spike in energy costs would likely lift inflation only temporarily. Over a longer horizon, it said inflation was poised to run at or below its 2 percent target.

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Graphic - consumer prices: http://link.reuters.com/cam27s

Graphic - core CPI: http://link.reuters.com/mam27s

Graphic - industrial output: http://link.reuters.com/fem27s

Graphic - consumer sentiment: http://link.reuters.com/xem27s

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GASOLINE HURTS SENTIMENT

Gasoline prices have increased 53 cents since the start of the year to an average of $3.88 a gallon in the week to Monday.

That helped pull the Thomson Reuters/University of Michigan index on consumer sentiment down to 74.3 early this month from 75.3 in February.

Consumer expectations for inflation one year ahead jumped to 4 percent from 3.3 percent, but the five-year reading rose only slightly to 3 percent, and the survey's director said Americans do not expect the steep climb in gasoline costs to last.

Overall, the data indicate that $4 gasoline has lost its shock value, although the drain on discretionary income will still affect spending, mostly among lower-income households, survey director Richard Curtin said.

Inflation expectations among investors, as signaled by spreads in the bond market, have also been on the rise, supported by a stream of relatively upbeat economic data. Inflation expectations, however, as measured in the U.S. Treasuries debt market, fell back a bit after the CPI report.

Tensions over Iran's nuclear program have kept alive fears of oil supply disruptions and have pushed prices higher.

With gasoline weighing on the economy's recovery, President Barack Obama, who faces re-election in November, has been considering tapping strategic oil stocks to ease the price pressure.

Other data on Friday showed the economy continues to expand moderately. Production at the nation's mines, factories and utilities held steady last month after a 0.4 percent gain in January, the Federal Reserve said.

Manufacturing output rose 0.3 percent, even as automakers cut production by 1.1 percent after two big monthly gains. Carmakers had raised production to meet pent-up demand for popular models in short supply.

While higher energy prices and the euro zone recession are headwinds for manufacturers, an expanding U.S. economy, propelled by strengthening job market gains, should keep factory activity strong this year, said Paul Edelstein, an economist at IHS Global Insight in Lexington, Massachusetts.

INFLATION OUT PACES WAGES

On Wall Street, the Standard & Poor's 500 index <.SPX> edged up to wrap up its best week in three months. It gained 2.4 percent for the week as it topped 1,400 to reach its highest level since May 2008.

U.S. Treasury debt prices fell for an eighth straight day, with benchmark yields touching four-month highs. The dollar weakened broadly.

The CPI report showed gasoline prices soared 6 percent last month, the largest increase since December 2010. They had risen 0.9 percent in January. While the strengthening jobs market is providing some cushion against rising gas prices at the pump, salaries are not keeping up.

Average weekly earnings, adjusted for inflation, fell 0.3 percent last month after slipping 0.1 percent in January, the Labor Department said. Compared with February last year, weekly earnings were down 0.4 percent.

But there was some price relief for households. Food costs held steady in February, marking the first time in 1-1/2 years they did not risen, and apparel prices dropped by the most since July 2006.

There were also declines in the prices of tobacco, airline tickets and used cars and trucks. Recreation costs also fell. But new motor vehicle prices recorded their first increase in nine months, reflecting rising domestic demand for autos.

A measure of the amount homeowners would pay to rent or would earn from renting their property - one of the largest single components of the CPI - rose at the slowest pace since April. Rents have risen as Americans have moved away from ownership in the face of persistent declines in house prices.

The downward trajectory for consumer price inflation remains largely intact, said Millan Mulraine, a senior macro strategist at TD Securities in New York.

(Additional reporting by Mark Felsenthal and Leah Schnurr; Editing by Neil Stempleman and Leslie Adler)

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