U.S. consumer prices inched up 0.1 percent in January as energy prices tumbled for the second straight month, according to a report on Wednesday that helped soothe recent anxiety about inflation.

Excluding volatile food and energy costs, the Consumer Price Index (search) rose 0.2 percent for a fourth straight month in January, the Labor Department (search) said.

Wall Street economists had expected a 0.2 percent rise in the CPI, both overall and excluding food and energy, but traders had braced for larger gains after a report on Friday showed a big pickup in core producer prices.

The tame consumer price report helped allay concerns the Federal Reserve (search) could step up its so-far "measured" campaign of interest-rate rises to keep inflation in check.

"Inflation at the end of the day is headed higher, it's just not going to happen that dramatically this year," said Mark Vitner, an economist at Wachovia Securities in Charlotte, North Carolina. "This leaves the Fed exactly where they are."

Prices for U.S. stocks and government bonds got a boost from the data, and U.S. stock futures rose, while the dollar pared earlier gains.

Over the past 12 months, the core CPI — the reading excluding food and energy — is up 2.3 percent, just a tick higher than for the period through December.

Energy prices dropped 1.1 percent in January, with fuel oil prices off 5.2 percent, natural gas costs down 3.0 percent and gasoline off 2.1 percent.

However, energy prices have risen sharply over the past year and a recent renewed climb in crude oil prices threatens further gains. U.S. benchmark crude oil prices soared to a 16-week high of $51.40 on Tuesday and were little changed on Wednesday.

"It is questionable how much comfort market participants can take from these estimates" of the January energy price drop, said Roger Kubarych, senior economic adviser at HVB Bank.

Fed Chairman Alan Greenspan (search) told Congress last week the economy had kicked off the year in good shape "with inflation and inflation expectations well anchored."

Merrill Lynch Chief North American Economist David Rosenberg said the CPI report "illustrates how hard it is to pass on costs from the producer to the retail sector, replete as it is with overcapacity and intense competitive pressures."

Some economists, however, said price pressures were slowly building and said the Fed's forecast for a 2005 increase of 1.5 percent to 1.75 percent in its favorite core inflation measure, released just last week, already was in jeopardy.

Food costs rose just 0.1 percent, as did prices for housing, recreation and education and communication. But apparel prices gained 0.3 percent, a turnaround from a 0.4 percent December drop, and medical care prices continued their steep ascent with a 0.4 percent increase.

In addition, tobacco prices shot up 1.9 percent, which economists saw as a temporary aberration, while the cost of new vehicles advanced 0.7 percent. A steep 0.9 percent decline in airfares helped offset those gains.

While the rise in inflation was muted last month, a slight drop in average weekly earnings meant workers still lost ground. Over the last 12 months, inflation-adjusted average weekly earnings are down 0.7 percent, the department said.

Separate reports showed U.S. chain store sales above year-ago levels.

The International Council of Shopping Centers (search) and UBS said U.S. chain store retail sales dipped 0.1 percent last week but were up 1.8 over the past year. Redbook Research said sales at major retailers were up 0.7 percent so far this month compared top January and 2.9 percent above year-ago levels.

Separately, the Mortgage Bankers Association said applications for U.S. home mortgages decreased last week as a drop in home-buying offset a slight increase in refinancing.