Rising food and gasoline prices lifted U.S. consumer inflation as expected in March, but underlying inflation pressures remained contained, a government report showed on Friday.

A gauge of manufacturing in New York State rose in April to its highest level in a year, and the state employment index jumped to its highest since May 2004, the New York Federal Reserve said in a report on Friday.

KEY POINTS:

* The Labor Department said its Consumer Price Index increased

0.5 percent after rising by the same margin in February. That was in line with economists' expectations. * Core CPI -- excluding food and energy - edged up 0.1 percent after gaining 0.2 percent the prior month, and below economists' expectations for a 0.2 percent rise. * The New York Fed's Empire State general business conditions index increased to 21.7 in April from 17.50 in March. * Economists polled by Reuters had expected a figure of 16.90 for April.

COMMENTS:

KRISHEN RANGASAMY, SENIOR ECONOMIST, CIBC WORLD MARKETS, TORONTO

U.S. headline CPI was a bit hotter than expected, rising 0.5 percent in March and taking the year-on-year rate up six ticks to 2.7 percent. The core rate was milder....The higher annual inflation rates are unlikely to change the Fed's loose stance on monetary policy for now.

The Fed views the current spike in energy prices as transitory and in its Beige Book it suggested that wage pressures are well contained, which means that it sees little risk at this point of higher energy prices spilling over into broad-based inflation.

Nonetheless, the hotter-than-expected headline CPI as well as the stronger-than-expected Empire Manufacturing index for April, which came out at the same time as CPI, could take some steam out of the Treasury rally this morning.

DAVID WYSS, CHIEF ECONOMIST, STANDARD & POORS RATINGS SERVICES, NEW YORK

It's pretty much within expectations with most of it coming in energy. The core rate is up only 0.1 percent and the year-over-year increase is only 1.2 percent. That's at the low end of the Fed's target.

The only place that there is inflation is energy, and the Fed can't print oil. Even food prices are coming on the wholesale level.

The Fed is not going to see inflation as a threat so they have the freedom to keep interest rates low longer. But core inflation is creeping up from its lows six months ago, so the Fed is going to end its extraordinary measures. There will be no QE3.

VIMOMBI NSHOM, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON REUTERS

Consumer prices rose by 0.5 percent for the second month in March, primarily on food and energy, as prices rose just 0.1 percent when excluding these goods -- a tenth of a percentage point lower than February's (as well as January's) core gain of 0.2 percent. Having risen consecutively in nine of the past 12 months, prices are up 2.7 percent over the year. Typically, food and energy prices largely influence the overall reading--and today's report is no difference with nearly 75 percent of March's all-item's reading -- but in today's report, this 0.4 percent difference between core and headline is the largest spread since CPI turned positive in July.

The core gains that had elevated February's performance were missing in March, as some items falling/becoming more negative and the a majority of the rest posted smaller gains. Apparel, which was positive in January (1 percent), fell by 0.5 percent after having fallen 0.9 percent in the month prior. For example, airline fare rose 1.9 percent (compared to 2.2 percent) and light vehicle truck prices rose 0.7 percent (had risen 1 percent). Core prices are up 1.2 percent since March 2010-- notably below the 1.9 percent annual average growth in the past ten years.

STEVE GOLDMAN, MARKET STRATEGIST, WEEDEN & CO., GREENWICH, CONNECTICUT

ON EMPIRE STATE:

Again it was better. It's a regional survey, which is not as good as national, but it continues with the overall feeling that the economy (while) fragile continues to expand. We have seen higher oil prices, and the question is how is this affecting output of manufacturers. And, so far we're seeing things remain relatively robust.

MARKET REACTION:

STOCKS: U.S. S&P stock index futures turn positive.

BONDS: U.S. bond prices extend gains, 30-year long bonds up a point. TIPS breakevens narrow further.

FOREX: The dollar extends losses versus yen, pares gains versus euro.

Inflation