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Update: US February inflation in line with expectations

U.S. annual headline inflation edged up to 2.2% in February, up from the prior month's 2.1% figure and in line with expectations, calming market fears that rising prices might push the Federal Reserve to raise rates faster.

Annual core inflation, which excludes food and energy prices, was unchanged at 1.8% in February as compared to the prior month, according to Labor Department statistics released March 13, also meeting market expectations.

Not even the sudden ousting of U.S. Secretary of State Rex Tillerson seemed to have an effect on market reaction. The S&P 500 Index was up 0.42% at 2,794.70 at 10 a.m. ET and the Nasdaq Composite Index was up 0.37% at 7,616.55. Yields on benchmark 10-year Treasury bonds were down to 2.854%. Yields on bonds fall as prices rise.

U.S. data released in February showed wages and prices rising faster than predicted, leading to a sell-off in stocks on concerns that the Fed would hike interest rates faster. Though the Fed uses core personal consumption expenditure as its inflation benchmark, markets look to CPI as an advance indicator of what might be in store when CPE data is next released.

Assessing February's CPI data, analysts at Morgan Stanley said in a research note that they expect February core PCE inflation to be up 0.17%, which would keep the year-over-year rate at 1.52%. The analysts said they expect headline PCE inflation to rise 0.14% for the month, keeping the yearly rate at 1.7%.

The U.S. central bank, which raised rates three times in 2017, is expected to do so again next week as prices and employment continue to rise.

Seasonally adjusted growth in the consumer price index eased to 0.2% in February on a monthly basis, after it increased 0.5% in January. Core consumer prices rose 0.2% in February as compared to a 0.3% jump in the previous month. The seasonally adjusted energy price index gained 0.1% in February while the apparel index added 1.5%.

However, four rate hikes from the Fed this year may still be in the cards.

Starting next month, a distortion related to cell phone data pricing will drop out of the annual comparison, which has been chopping 0.2 to 0.3 of a percentage point off most inflation measures. Once that distortion is removed, core CPI should move back up to 2%, and the headline rate move closer to 2.5% or 2.6% year over year, according to an ING research note.

Rising housing and medical costs also could add upward momentum to overall inflation over coming months, with the weaker dollar expected to provide a boost too.

"This is a key reason why we expect four rate hikes from the Fed this year," according to the ING note.