New U.S. claims for unemployment benefits fell as expected last week, with the four-week moving average dropping to its lowest level in more than 2-1/2 years, pointing to a strengthening labor market.

U.S. consumer prices rose at their fastest pace in more than 1-1/2 years in February, driven by higher food and energy prices, a government report showed on Thursday, but underlying inflation pressures remained generally contained.

KEY POINTS:

* The Labor Department said its Consumer Price Index rose 0.5 percent, the largest gain since June 2009, after increasing 0.4 percent in January. * Core CPI, excluding food and energy -- increased 0.2 percent after advancing by the same margin in January. * Initial claims for state unemployment benefits fell 16,000 to a seasonally adjusted 385,000, the Labor Department said. * Economists polled by Reuters had forecast claims falling to 387,000. The prior week's figure was revised up to 401,000 from the previously reported 397,000.

COMMENTS:

KIM RUPERT, MANAGING DIRECTOR OF GLOBAL FIXED INCOME ANALYSIS,

ACTION ECONOMICS, SAN FRANCISCO:

We expected consumer prices to edge up and they were pretty much right on target. (Jobless) claims have been very volatile, up and down, but the trajectory continues to decline so that is another good sign for the labor market. The growth in the economy is still not sufficient to bring claims down and the unemployment rate down to where we would like it, but it is still the right direction.

Both data points would typically be bearish for Treasuries and we are seeing Treasuries lower today but mostly on events overseas, and a pickup in equities. It is the first decline we have seen in Treasuries this week. Most of the focal point is on events overseas.

TOM PORCELLI, U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK

CPI: First of all it was a very firm core reading. But this firmer core comes even in the face of apparel prices dropping almost a full percentage point.

One of the things that we had been saying at the beginning of the year was that the hurdle was very low to get core prices up 2 percent for the year. But we've had fairly firm core month over month changes so that's actually lowering the hurdle. We think getting to 2 percent is going to be actually rather easy and so we're sort of left wondering why the consensus does not see 2 percent by the end of the year.

I don't think it means anything for the Fed. They're going to probably wind up saying some of this is transitory. It won't be sustained. But I think that the Fed is -- don't forget where they were two months ago. They were worried about a Japan-style deflation playing out in the U.S. here. Keep in mind and even if you do get around 2 percent or 2.2 percent, that's just north of the top end of their range.

Two quarters now -- Q4, Q1 are -- going to be pretty darn solid. And the unemployment rate averaged, what, 9.5 percent in the fourth quarter? And look at retail sales. How does that happen? I'll tell you how it didn't happen. It wasn't because of increased use of credit or a marked drawdown in savings. You had job growth. Wages, real average weekly earnings, that is rising at a 3 percent year-on-year rate.

DAVID SLOAN, ECONOMIST, IFR ECONOMICS, A UNIT OF THOMSON

REUTERS:

On jobless claims:

There was little surprising in the latest initial claims release, which resumed its downtrend after last week's upward correction, though continuing claims fell more sharply than expected. The report implies continued labor market improvement in early March.

On CPI:

The 0.5 percent rise in overall February CPI, and the 0.2 percent rise ex food and energy, both exceeded consensus expectations by 0.1 percent. This means that the positive contribution from food and energy was in line with expectations, but the core was stronger than forecast. The upside surprise on the core, in contrast to a similar outcome in January, cannot be attributed to special factors. This is the second straight 0.2 percent rise in the core rate, a pace that no month in 2010 was able to reach.

MARKET REACTION: STOCKS: U.S. stock index futures pare gains. BONDS: U.S. bond prices maintain earlier losses and TIPS breakeven rates extended their rise. FOREX: The dollar pares losses versus euro.

Unemployment Fall