Tame U.S. inflation supports Fed's cautious rate policy

(Adds details, analyst comments, updates markets)

* Consumer prices rise 0.1 percent in March

* Core CPI edges up 0.1 percent, slows from February

* Weekly jobless claims fall 13,000

By Lucia Mutikani

WASHINGTON, April 14 (Reuters) - U.S (Other OTC: UBGXF - news) . consumer prices barely rose in March and underlying inflation slowed, suggesting little urgency for a cautious Federal Reserve to raise interest rates in the near term.

The benign inflation backdrop is prevailing despite tightening labor market conditions, underscored by other data on Thursday showing the number of Americans filing for unemployment benefits back at a 42-1/2-year low last week.

"A rate hike is unquestionably off the table for April, with a June rate increase increasingly unlikely barring a surge in domestic activity and perceived calm on the international front," said Lindsey Piegza, chief economist at Stifel Fixed Income in Chicago.

The Labor Department said its Consumer Price Index gained 0.1 percent last month as a rebound in gasoline prices was partially offset by a drop in the cost of food.

Medical care and housing costs also retreated in March after strong increases in the prior two months.

The CPI fell 0.2 percent in February. In the 12 months through March, the CPI (Other OTC: CPICQ - news) increased 0.9 percent after advancing 1.0 percent in February.

Economists had forecast the CPI gaining 0.2 percent last month and rising 1.1 percent from a year ago.

The so-called core CPI, which strips out food and energy costs, inched up 0.1 percent after two strong monthly readings. March's increase in the core CPI was the smallest since August and followed a 0.3 percent rise in February.

In the 12 months through March, the core CPI rose 2.2 percent after gaining 2.3 percent in February.

The Fed has a 2 percent inflation target and tracks an inflation measure which is running below the core CPI. Fed Chair Janet Yellen recently expressed doubts about the sustainability of broad gains in prices and said she believed that "transitory" factors were behind the run-up in prices.

The Fed's policy-setting committee meets on April 26-27. Market-based measures of Fed policy expectations have priced out a rate hike at this month's meeting and have almost eliminated the chances of a move in June, according to CME Group (Kuala Lumpur: 7018.KL - news) 's FedWatch. It (Other OTC: ITGL - news) currently gives a 41 percent probability of a rate increase in November and a 55 percent chance in December.

The Fed lifted its benchmark overnight interest rate in December for the first time in nearly a decade and policymakers recently forecast only two more rate hikes this year.

The dollar was trading higher against a basket of currencies, while prices for U.S. government debt fell. U.S. stocks were little changed.

TIGHT JOBS MARKET

In a second report, the Labor Department said initial claims for state unemployment benefits decreased 13,000 to a seasonally adjusted 253,000 for the week ended April 9. That matched the level for early March, which was the lowest since November 1973.

Jobless claims have now been below 300,000, a threshold associated with healthy labor market conditions, for 58 weeks, the longest stretch since 1973.

Labor market strength comes despite recent reports on trade, wholesale inventories, retail sales and business spending suggesting economic growth almost halted in the first quarter after posting a 1.4 percent annualized rate in the fourth quarter of 2015.

Growth estimates for the January-March quarter are as low as a 0.2 percent pace.

"Low labor market separations and steady payroll gains should produce healthy household income growth over the next few months, indicating the likelihood of a rebound in consumption and overall GDP growth following the apparent softness in the first quarter," said Jesse Hurwitz, an economist at Barclays (LSE: BARC.L - news) in New York.

Last month, gasoline prices rose 2.2 percent after plunging 13.0 percent in February. Food prices fell 0.2 percent, with the cost of food consumed at home posting its largest decline since April 2009.

The core CPI was restrained by housing and medical costs, as well as apparel. Owners' equivalent rent of primary residence increased 0.2 percent after increasing 0.3 percent in February.

Medical care costs slowed their rapid ascent, gaining only 0.1 percent after shooting up 0.5 percent in February. Apparel prices fell 1.1 percent in March, reversing the prior month's 1.6 percent advance.

Despite the moderation in the core CPI last month, economists believe that a fading dollar rally, stabilizing oil prices and tightening labor market have laid the foundation for a pick-up in inflation this year.

"The fundamentals point to higher inflation in the near term," said Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)