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 pain at the pump will last and expect the labor market to strengthen further.

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.

Outside the volatile food and energy categories, inflation pressures were generally contained. The core CPI edged up 0.1 percent after gaining 0.2 percent in January.

Despite the spike in energy prices, which should have only temporary effects on CPI inflation, the downward trajectory for consumer price inflation remains largely intact, said Millan Mulraine, senior macro strategist at TD Securities in New York.

We expect the benign inflationary backdrop and weak pace of slack absorption the economy to provide a supportive environment for monetary policy.

The Federal Reserve said on Tuesday that the recent spike in energy costs would likely push up inflation temporarily. Over the medium-term, inflation was likely to run at or below its 2 percent target, it said.

While the central bank reiterated its expectation that overnight interest rates would remain near zero at least through late 2014, it offered no clues on whether it would launch a third round of bond buying to stimulate the recovery further.

Gasoline prices increased 20 cents last month. That caused the Thomson Reuters/University of Michigan index on consumer sentiment to dip to 74.3 early this month from 75.3 in February. Consumers, however, did not expect the run-up in gasoline prices to last very long.

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.

Government debt prices extended losses after the data. The dollar fell against the euro and pared gains against the yen. Stocks opened slightly higher.

In another report, the Fed said production at the nation's mines, factories and utilities held steady last month after an upwardly revised gain of 0.4 percent in January.

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.

Mining output slid sharply for a second straight month, partly reflecting a drop in natural gas extraction. Demand for natural gas has fallen sharply due to an unusually warm winter.

Utility production, which plummeted in both December and January, was flat.

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

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

Graphic - industrial production:

http://link.reuters.com/fem27s

Graphic - U. Michigan consumer sentiment:

http://link.reuters.com/xem27s

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PAIN AT THE PUMP

A stream of relatively upbeat economic data has raised inflation expectations in the bond market, although they fell back a bit after the CPI report.

The 10-year break-even rate - the gap between the yields on 10-year Treasury Inflation-Protected Securities and regular 10-year Treasuries - touched 2.40 percent early Friday, its highest level since last August.

In the CPI report, gasoline prices soared 6 percent, the largest increase since December 2010. They had risen 0.9 percent in January.

Although surging gasoline prices are a strain on consumers, they have so far not caused a sharp pullback in spending, thanks to a strengthening jobs market. But salaries are not keeping up with rising inflation.

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

But there is some relief for households. Food prices were flat last month after rising 0.2 percent in January. It was the first time since July 2010 that food prices had not risen.

Overall consumer prices rose 2.9 percent year-on-year after increasing by the same margin in January.

Core consumer prices last month were restrained by the cost of apparel, which fell 0.9 percent - the most since July 2006. There were also declines in the prices of tobacco, airline tickets and used cars and trucks.

But new motor vehicle prices rose 0.6 percent after being flat in January.

Owners' equivalent rent rose only 0.1 percent last month after increasing 0.2 percent the prior month. Rents have risen as Americans have moved away from home ownership in the face of persistent declines in house prices.

In the 12 months to February, the core CPI increased 2.2 percent after rising 2.3 percent in January. This measure has rebounded from a record low of 0.6 percent in October.

Consumer price index Inflation