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UPDATE 1-U.S. consumer prices rise moderately in January

(Updates with economists reaction, more details)

By Caren Bohan

WASHINGTON, Feb 21 (Reuters) - Costlier energy boosted U.S. prices at the retail level in January but costs for everything from food to new cars were tame, the government said on Friday in a report that may allay inflation fears.

The Consumer Price Index, the main U.S. inflation gauge, advanced 0.3 percent last month, the Labor Department said, matching the expectations of private economists.

It was the biggest rise in the index since April 2002 but was overwhelmingly driven by energy costs, which soared 4.0 percent on the back of frigid weather and worries about a U.S. war with Iraq.

The core CPI, which strips out volatile food and energy costs, rose only 0.1 percent -- less than the 0.2 percent increase projected by economists in a Reuters survey.

Even new car prices, which helped lead to to a worrisome rise in wholesale prices in January, were soft at the consumer level in the month -- an indication that dealers still have little power to raise prices, economists said.

"The core inflation continues to be well-behaved. We still have a dichotomy between core goods prices that are falling and core service prices that are rising," said Jade Zelnik, chief economist at RBC Greenwich Capital Markets in Greenwich, Conn.

"On balance, core inflation is virtually nonexistent ... Energy prices are dominating the index and will boost the CPI even more in February," Zelnik added.

Bonds and the dollar showed little reaction to the report.

The data came one day after Labor said its Producer Price Index, which measures prices at the farm and factory gate, surged an unexpectedly large 1.6 percent.

If inflation were to break higher, it could complicate an already uncertain U.S. economic picture by limiting the leeway of the Federal Reserve to use lower interest rates to spur growth.

Prices on a wide range of goods within the index were muted. Food prices fell 0.2 percent, the biggest drop since January 1997. Apparel and new-car prices both slid 0.9 percent. Even medical care costs, which typically outpace other components, rose just 0.1 percent -- the smallest rise since January 1998.

Housing prices, which make up more than 40 percent of the CPI, rose by 0.4 percent, offsetting weakness in many of the other core components.

Within the energy segment, fuel oil costs spiked 8.6 percent, natural gas climbed 4.6 percent and gasoline prices jumped 6.6 percent.

During the past 12 months, the CPI has risen 2.6 percent overall and 1.9 percent excluding food and energy.