*

Consumer prices increase 0.4% in February

*

Gasoline, shelter account for over 60% of rise in CPI

*

Core CPI gains 0.4%; up 3.8% on year-on-year basis

By Lucia Mutikani

WASHINGTON, March 12 (Reuters) - U.S. consumer prices

increased solidly in February amid higher costs for gasoline and

shelter, suggesting stickiness in inflation that cast some

doubts on whether the Federal Reserve would start cutting

interest rates in June.

February marked the second straight month of firmer

inflation readings. Inflation-weary Americans, however, got some

relief from their grocery bills, as food prices were unchanged.

U.S. central bank officials, including Fed Chair Jerome Powell

have indicated they are in no rush to start lowering borrowing

costs.

The higher cost of living is one of the key issues in the

Nov. 5 U.S. presidential election.

"Officials want to see some more evidence of a sustained

deceleration in prices towards target before they pivot to rate

cuts," said Rubeela Farooqi, chief U.S. economist at High

Frequency Economics. "The latest data further reinforce the case

for a patient and vigilant approach from Fed officials as they

consider future policy decisions."

The consumer price index (CPI) rose 0.4% last month after

climbing 0.3% in January, the Labor Department's Bureau of Labor

Statistics (BLS) said on Tuesday. Gasoline prices rebounded 3.8%

after declining 3.3% in January. Shelter, which includes rents,

rose 0.4% after advancing 0.6% in the prior month.

These two categories contributed more than 60% to the

monthly increase in the CPI. Food prices were unchanged after

rising 0.4% in January. There were decreases in the prices of

dairy products, fruits and vegetables as well as nonalcoholic

beverages. But prices for cereals and bakery products rose while

meat, fish and eggs were slightly more expensive.

In the 12 months through February, the CPI increased 3.2%,

after advancing 3.1% in January.

Economists polled by Reuters had forecast the CPI would gain

0.4% on the month and increase 3.1% on a year-on-year basis. The

annual increase in consumer prices has slowed from a peak of

9.1% in June 2022, but progress has stalled in recent months.

Financial markets continue to expect the Fed will cut rates

in June. Since March 2022, the U.S central bank has raised its

policy rate by 525 basis points to the current 5.25%-5.50%

range.

U.S. stocks opened higher. The dollar rose against a basket

of currencies. U.S. Treasury prices fell.

UPWARD SPIRAL

"Something is wrong with the market's assessment because

services prices continue to spiral upward and commodity prices

are no longer falling like they did, which helped to slow

inflation's advance," said Christopher Rupkey, chief economist

at FWDBONDS.

Inflation picked up in January, which was largely blamed on

price raises at the start of the year by service providers,

which economists said were not fully addressed by the model used

by the government to strip out seasonal fluctuations from the

data.

There was also a jump in owners' equivalent rent (OER), a

measure of the amount homeowners would pay to rent or would earn

from renting their property, which diverged from rents. That was

partly the result of some methodology changes by the government.

The BLS last week held a webinar to discuss the underlying

methodology related to the January OER and rent data.

"There is a high likelihood that OER inflation will exceed

rent inflation more often moving forward," said Stephen Juneau,

an economist at Bank of America Securities. "However, we think

that much of the 20 basis points divergence was noise and not

signal. Rent and OER inflation should continue to moderate over

the course of this year, helping to drive core inflation lower

as goods price deflation dissipates."

Excluding the volatile food and energy components, the CPI

increased 0.4% last month after rising by the same margin in

January. Shelter was also the main driver of the so-called core

CPI. Rents increased 0.5% after gaining 0.4% in January. OER

climbed 0.4% after surging 0.6% in the prior month.

Airline fares accelerated 3.6% after rising 1.4% in January.

Motor vehicle insurance cost 0.9% more. There were also

increases in the prices of apparel, recreation, used cars and

trucks. But the cost of healthcare was unchanged after rising

0.5% in the prior month. Hospital services costs decreased 0.6%

and prescription medication was slightly cheaper. The cost of

dental services, however, increased 0.4%.

In the 12 months through February, the core CPI advanced

3.8%. That was the smallest year-on-year increase since May 2021

and followed a 3.9% rise in January.

The Fed tracks the personal consumption expenditures price

indexes for its 2% inflation target. These measures are running

at tamer rates than the CPI. Though job growth accelerated in

February, the unemployment rate increased to a two-year high of

3.9% and annual wage inflation moderated a bit.