Inflation up at 2.1% annual rate

NEW YORK (CNNMoney.com) -- Consumer prices in February rose from a year ago amid higher energy costs, but the pace of price increases slowed for the second straight month, the government reported Thursday.

The Consumer Price Index, the government's key inflation measure, rose 2.1% over the past 12 months, driven by a 37% climb in gasoline costs during the period. In January, prices climbed 2.6% from the previous year.

The so-called core CPI, which is closely watched by economists because it strips out volatile food and energy prices, rose 1.3% over the past year, the smallest gain since February 2004.

February. For the month, overall prices were unchanged as declining energy prices offset increases in prices of food and other items. Economists surveyed by Briefing.com were expecting prices to rise 0.1%. Prices rose 0.2% in January.

Food costs edged up 0.1% during the month, while energy prices fell for the first time since April 2009, posting a 0.5% decline. The drop was due to a 1.4% dip in gasoline prices.

Core CPI for the month rose 0.1%, in line with economists' expectations and up from the 0.1% decrease in January.

Medical care costs rose for a second straight month and prices of new cars and used cars and trucks were also higher. The costs of clothing and airline fares decreased, while housing costs held steady.

The tame inflation reading supports the Federal Reserve's decision to continue to hold its key interest rate near zero.

"Core inflation continues to be a non-issue in the near-future, so the Fed's easy monetary policy can continue into the third and fourth quarter of this year without inflation being an issue," said Adam York, an economist at Wells Fargo.

He added that the oversupply in the housing market will continue to put downward pressure on home prices, which will hold core inflation low for up to a year.

"When the housing market returns to a normal level and then home prices begin rising, inflation will pick up, probably in early 2011" he said. "It will pick up steam throughout next year as we see the economy recover."