(Reuters) - U.S. consumer prices increased less than expected in February, but the improvement is likely temporary against the backdrop of aggressive tariffs on imports that are expected to raise the costs of most goods in the months ahead.

The consumer price index rose 0.2% last month after accelerating 0.5% in January, the Labor said on Wednesday. In the 12 months through February, the CPI increased 2.8% after climbing 3.0% in January. Economists polled by Reuters had forecast the CPI gaining 0.3% and advancing 2.9% year-on-year.

The first full inflation report of President Donald Trump's administration still left prices running at levels that economists say are inconsistent with the Federal Reserve's 2% target.

MARKET REACTION:

STOCKS: U.S. stock index futures extended a gain to +1.2%, pointing to a strong open on Wall Street

BONDS: The 10-year U.S. Treasury yield fell then rose to 4.312% little changed from before the release, while the two-year yield was off slightly at 3.987 after initially falling hard.FOREX: The dollar index extended to 0.25% higher, and the euro eased a bit more to -0.3%

COMMENTS:

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, NORTHLIGHT ASSET MANAGEMENT, CHARLOTTE, NORTH CAROLINA (by email)

"The tariff-battered markets are going to breathe a sigh of relief this morning, as higher inflation was the only thing that could make things worse. With a lower-than-expected inflation number (both month-over-month and year-over-year), at least the Fed still has the flexibility to step in to support a weaker economy, and that would be good news for markets, which have been through the ringer in the past month and a half.

KAY HAIGH, GLOBAL CO-HEAD OF FIXED INCOME AND LIQUIDITY SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK (by email)

“The February CPI release showed further signs of progress on underlying inflation, with the pace of price increases moderating after January’s strong release. While the Fed is still likely to remain on hold at this month’s meeting, the combination of easing inflationary pressures and rising downside risks to growth suggest that the Fed is moving closer to continuing its easing cycle.”

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

"We’re not out of the woods, yet. We’re not even in the woods. This report will serve as the baseline for seeing how much tariffs are resulting in higher consumer prices. Good news on CPI could be bad news for profit margins of businesses. Someone pays the price of tariffs and the question is whether companies have the pricing power to push cost increases onto households."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“This is good news on the inflation front, but of obviously with the imposition of tariffs, we still don't know where the real direction of inflation is at this time, but based on month-to-month and year-to-year, it's moving in the right direction.”

“Does this move the needle for the Fed? I don't think so. At next week's FOMC meeting they'll probably talk about this. They'll probably say they feel comfortable that the inflation is headed in the right direction but will obviously talk about the unknown and that unknown is the effects of the tariffs.”

“And you know, after such a long period of strong declines I think the market is going to have a relief rally here. After today’s inflation data investors will probably take a rest in terms of worrying over the tariffs.”

JEANETTE GARRETTY, CHIEF ECONOMIST, ROBERTSON STEPHENS, SAN FRANCISCO CALIFORNIA

"This should end for a while anyway, stagflation concerns. The dominant concern in the market that started last week was economic growth and then you got stagflation concerns. And I will go out there and say, we have actually never in the United States seen stagflation. I call it the abominable snowman. It's talked a lot about, but you don't see it. And maybe this is an example of one of the reasons why, because as the economy slows, you would expect to see some of the price pressures come off and the economy is slowing."

"I don't expect that there's a need for (The Fed) to do anything in next meeting, but it will allow them to talk intelligently about what they will do in the remainder of this year. And I think it probably means that they're going to signal that, as they earlier forecasted, there will be a cut or two in interest rates sometime this year."

(This story has been refiled to fix a typo in Peter Cardillo's quote)

(Compiled by the Global Finance & Markets Breaking News team)