March 18 (Bloomberg) -- The cost of living in the U.S. increased more than forecast in February, reducing concern of a deflationary spiral that might push the nation toward a depression.

The consumer price index climbed 0.4 percent after a 0.3 percent rise in January, the Labor Department said today in Washington. Excluding food and fuel, the so-called core rate advanced 0.2 percent. The gains pushed the annual core inflation rate up to 1.8 percent, within the range that most Federal Reserve officials say is their objective.

The Fed today announced about $1.1 trillion in additional measures to revive financial markets, including purchases of long-term Treasury securities, in a bid to stem the economic slump and prevent prices from declining. Last month’s rise in consumer prices was spurred in part by car and clothing gains that may slow as Americans restrain spending.

“It brings some relief to the Fed, they are exactly in the middle of their comfort zone,” said Harm Bandholz, a U.S. economist at UniCredit Group in New York, who correctly forecast the rise in the core rate.

The Fed said it would buy $300 billion in Treasury securities and increase its purchases of agency mortgage-backed securities by up to $750 billion in an effort to bolster housing. The central bank also kept its benchmark overnight rate unchanged within a range of zero to 0.25 percent.

Too-Low Inflation

Fed policy makers see “some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the long term,” the policy statement said.

Treasuries surged after the Fed announcement. Benchmark 10- year note yields plunged to 2.50 percent at 4:13 p.m. in New York, from 3 percent late yesterday. The Standard & Poor’s 500 Index reversed early losses to close up 2.1 percent at 794.35.

Today’s price report comes after Chairman Ben S. Bernanke said in an interview with CBS television’s 60 Minutes program that “we’ve averted” depression risks.

A separate report today showed the U.S. current-account deficit narrowed more than forecast in the fourth quarter to $132.8 billion, reflecting a smaller trade gap. The shortfall, the broadest measure of trade because it includes transfer payments and investment income, was the smallest since 2003, the Commerce Department said.

Funding Deficit

Funding the current-account deficit requires the U.S. to attract approximately $1.9 billion a day from abroad or risk a drop in the value of the dollar and Treasury securities. China, which funds much of the U.S. imbalance, expressed concern last week about whether its holdings of Treasuries are a safe investment.

Consumer prices were forecast to rise 0.3 percent, according to the median of 71 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.1 percent to 0.7 percent. Costs excluding food and energy, known as core prices, were projected to rise 0.1 percent.

Prices rose 0.2 percent from February 2008, up from no change in the prior 12-month period, which was the weakest performance since 1955.

Energy expenses increased 3.3 percent, led by an 8.3 percent jump in gasoline prices. Still, the fuel’s cost is down 36 percent from a year earlier.

Food prices, which account for about a fifth of the CPI, fell 0.1 percent, the first drop since April 2006.

Commodity Costs

The cost of commodities, excluding food and fuel, rose 0.4 percent, the most since September 1999, indicating the broad- based nature of price increases. New vehicle prices increased 0.8 percent, the most since November 2004, and clothing costs jumped 1.3 percent, the most in almost 19 years.

These increases were only partially offset by cheaper air fares and hotel rates, and smaller increases in rents than in the prior month.

Today’s figures also showed wages decreased 0.3 percent in February after adjusting for inflation, and were up 2.5 percent over the last 12 months.

The CPI is the broadest of the three monthly price gauges from Labor, because it includes goods and services. Almost 60 percent of the CPI covers prices consumers pay for services ranging from medical visits to rent and movie tickets.

Prices aren’t falling even as the economy may be in the midst of the worst recession in the postwar era. Retailers extended post-holiday discounts to attract consumers battered by slumping house and stock values and the highest jobless rate in a quarter century.

Retailer Discounts

“We, along with the entire industry, were very promotional in an effort to reduce our inventory levels,” Nieman Marcus Group Inc. Chief Executive Officer Burton Tansky said on a March 11 conference call with analysts. The luxury retailer posted a second-quarter loss after discounting merchandise.

Still, economists caution that a deeper economic slump may cause the slowdown in inflation to turn into outright deflation. Longer term, others worry that the unprecedented fiscal stimulus and the Fed’s policy of buying more assets and pumping money into the financial system will reignite inflation.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net

Last Updated: March 18, 2009 16:15 EDT