By Lucia Mutikani
WASHINGTON (Reuters) - Manufacturing output bounced back in February, the latest signal of strength in an economy that is showing clear momentum after a near-stall at the end of last year.
Other reports on Friday showed the biggest increase in consumer prices in nearly four years last month as the cost of gasoline surged and a tempering in March of consumer sentiment and New York state manufacturing gains.
Factory production increased 0.8 percent in February after a revised 0.3 percent decline the month before, the Federal Reserve said on Friday. Economists polled by Reuters had looked for a 0.4 percent gain.
The increase combined with a big rise in utilities' output to lead overall industrial production up by 0.7 percent, a good sign for first quarter economic growth.
Separately, the Labor Department said its Consumer Price Index increased 0.7 percent last month, the largest gain since June 2009, after being flat in January.
Gasoline accounted for about three quarters of the spike in consumer inflation, and so-called core prices advanced just 0.2 percent, leaving the door open for the Federal Reserve to press ahead with its bond-buying stimulus.
"The way the data has been playing out it gives them a free hand to be extremely aggressive to bring down unemployment," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.
Economists polled by Reuters had expected the CPI to advance 0.5 percent. In the 12 months through February, it was up 2 percent, the largest gain since October and an acceleration from January's 1.6 percent.
Core prices, which strip out volatile food and energy costs, increased 2 percent. While that was a also the largest increase since October, economists saw it as being within the Fed's comfort zone.
Policymakers at the central bank meet next week to assess the economy and are widely expected to keep purchasing $85 billion in bonds per month to spur even stronger economic growth. The Fed has said it would keep up asset purchases until it sees a substantial improvement in the labor market outlook.
Gasoline prices rose 9.1 percent last month, the largest gain since June 2009, after falling 3 percent in January. Prices at the pump, however, have declined in the past two weeks.
U.S. stocks opened slightly lower, while U.S. government debt prices were higher.
CONSUMERS FEELING PINCH
The pick up in inflation eroded household purchasing power, which could hurt spending. Average hourly earnings adjusted for inflation fell 0.6 percent in February, and were up only 0.1 percent compared with a year ago.
Consumer sentiment weakened in March, according to a Thomson Reuters/University of Michigan's. U.S. consumer sentiment tumbled to its lowest since December 2011 in early March, hit by dissatisfaction with government economic policies and as fewer Americans expected improvements in growth or the labor market.
Data on Wednesday showed a big price-related pickup in sales at gasoline stations in February, but other retail sales rose as well, underpinning expectations for solid first-quarter growth.
The Fed's report on industrial production further bolstered those expectations. The gain in manufacturing output reflected a big 1.2 percent jump in the production of long-lasting goods.
Auto production rose a sharp 3.6 percent after a 4.9 percent plunge in January, the Fed said.
In a separate report, the New York Federal Reserve Bank said its "Empire State" general business conditions index slipped to 9.24 in March from 10.04 in February, an indication growth in the factory sector could be cooling a bit.
The inflation report showed housing costs maintained their steady rise last month. Owners' equivalent rent, which accounts for about a third of the core CPI, rose 0.2 percent after a similar gain in January.
Apparel prices fell 0.1 percent after increasing 0.8 percent in January. New motor vehicle prices fell 0.3 percent after gaining 0.1 percent the prior month.
Prices for used cars and trucks rose for a second straight month.
(Additional reporting by Margaret Chadbourn in Wsahington, and Richard Leong and Leah Schnurr in New York; Writing by Lucia Mutikani and Tim Ahmann; Editing by Neil Stempleman)
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