* Weekly jobless claims increase 16,000 to 219,000

* Continuing claims decrease 38,000 to 1.794 million,

lowest level since May 2024

* Core PCE price index rises 0.4% for second straight

month; up 3.0% year over year

By Lucia Mutikani

WASHINGTON, April 9 (Reuters) - New applications for

U.S. unemployment benefits increased moderately last week,

showing no signs of labor market deterioration and potentially

giving the Federal Reserve room to keep interest rates unchanged

as it monitors the economic fallout from the war with Iran.

Headline inflation picked up on a monthly basis in February and

economic growth almost braked in the fourth quarter, other data

showed on Thursday. Economists expect that price pressures

increased further in March as the U.S.-Israel war with Iran

drove up the cost of energy and other products. Though President

Donald Trump on Tuesday announced a two-week ceasefire on the

condition that Tehran reopen the Strait of Hormuz, the truce

appeared fragile.

Economists said the war, now in its second month, added another

layer of uncertainty for businesses that spent last year trying

to navigate a constantly shifting tariffs landscape.

"The war has increased the downside risks to the labor

market and we think it's too soon to assume that the ceasefire

announced earlier this week will last and to say those risks

have abated," said Nancy Vanden Houten, lead U.S. economist at

Oxford Economics. "But, so far, the claims data indicate that

labor market conditions are still stable, with no evidence of an

increase in layoffs or a further pullback in hiring."

Initial claims for state unemployment benefits rose 16,000

to a seasonally adjusted 219,000 for the week ended April 4, the

Labor Department said. Economists polled by Reuters had forecast

210,000 claims for the latest week. Low layoffs are anchoring

the labor market. A surge in global oil prices has sent the

national average gasoline retail price soaring above $4 per

gallon for the first time in more than three years and wiped

$3.2 trillion from the stock market in March.

Economists are bracing for a jump in inflation in March,

with the Consumer Price Index expected to increase about 1.0% on

a monthly basis, translating to a year-on-year rise of about

3.3%. The government will release the CPI report for March on

Friday.

Inflation already was elevated before the war, largely

because of Trump's broad import duties. A separate report from

the Commerce Department's Bureau of Economic Analysis showed the

Personal Consumption Expenditures Price Index increased 0.4% in

February after an unrevised 0.3% gain in the prior month. The

increase was in line with economists' expectations.

In the 12 months through February, PCE inflation advanced

2.8%, matching the gain in January. The BEA is still catching up

on data releases following delays caused by last year's U.S.

government shutdown.

Excluding the volatile food and energy components, the PCE

Price Index increased 0.4% in February for a second straight

month. In the 12 months through February, so-called core PCE

inflation advanced 3.0% following a 3.1% increase in January.

The slowdown in year-on-year core PCE inflation reflected last

year's high readings dropping out of the calculation.

The U.S. central bank tracks the PCE price measures for its 2%

inflation target. Economists say monthly PCE inflation needs to

increase 0.2% for a sustained period to bring inflation back to

target. The release on Wednesday of the minutes of the Fed's

March 17-18 policy meeting showed a growing group of

policymakers felt last month that interest rate hikes might be

needed to counter inflation.

The minutes also said "participants noted that a prolonged

conflict in the Middle East would likely lead to more persistent

increases in energy prices and that these higher input costs

would be more likely to pass through to core inflation."

The Fed left its benchmark overnight interest rate in the

3.50%-3.75% range. The odds of a rate cut this year have greatly

diminished.

U.S. stocks were trading lower as investors keep a wary eye

on the fragile ceasefire in the Middle East. The dollar fell

against a basket of currencies. U.S. Treasury yields were mostly

higher.

HIGHER PRICES INFLATE CONSUMER SPENDING

The labor market has been stuck in what economists call a

"low-hire, low-fire" state, which they blame on uncertainty

stemming from the Trump administration's aggressive trade policy

and mass deportations of migrants.

Though nonfarm payrolls rebounded by 178,000 jobs in March, the

median duration of unemployment at 11.4 weeks was the longest in

nearly 4-1/2 years.

The number of people receiving unemployment benefits after

an initial week of aid, a proxy for hiring, decreased 38,000 to

a seasonally adjusted 1.794 million during the week ended March

28, the lowest level since May 2024, the claims report showed.

But part of the decline in the so-called continuing claims

was likely because of people exhausting their eligibility for

benefits, which is limited to 26 weeks in most states. Some

unemployed young adults, who typically have a limited or no work

history, are not eligible to file for jobless benefits. They

have been the worst affected by the lethargic labor market.

Economists are watching for shifts in consumer spending in

the aftermath of the recent stock market selloff and rise in

gasoline prices, as these could impact the labor market.

The latest report from the BEA showed consumer spending,

which accounts for more than two-thirds of economic activity,

rose 0.5% in February after increasing 0.3% in January.

Spending, however, was inflated by high prices. When adjusted

for inflation, consumer spending edged up 0.1% after being flat

in January.

The data suggested consumer spending likely slowed further

in the first quarter after a significant slowdown in the

October-December quarter. The slow pace of spending contributed

to holding back gross domestic product growth to a 0.5%

annualized pace in the fourth quarter, a separate report from

the BEA showed. The economy grew at a 4.4% rate in the third

quarter.