Consumer prices rose modestly in March as falling electricity costs countered higher gasoline prices, boosting the view the U.S. Federal Reserve has room to provide more support for the economy if needed.

The Labor Department said on Friday its Consumer Price Index increased 0.3 percent after advancing 0.4 percent in February. That was in line with economists' expectations.

Outside the volatile food and energy category, inflation pressures appeared muted. Core CPI edged up 0.2 percent after gaining 0.1 percent in February.

The U.S. Federal Reserve has said it will probably hold interest rates super low until at least late 2014 to help the economy, which is limping back from the 2007-2009 recession. The central bank is charged with keeping inflation low while promoting full employment. The next policy meeting is scheduled for April 24-25.

Amid recent signs of weakness in the labor market, investors are betting the Fed could unleash further monetary stimulus to boost growth, although comments by Fed officials this week suggested the central bank is on hold as it waits to see whether the recovery gains traction.

I think the Fed has made it blatantly clear that inflation is not their first concern. They're more interested in growth and robust labor numbers, said Boris Schlossberg, who heads research at GFT Forex in Jersey City.

Government debt prices were steady at higher levels following the CPI data. The dollar pared gains against the euro. Stock index futures fell as concerns over Spain's rising borrowing costs resurfaced and after disappointing Chinese growth data.

Last month, overall inflation was pushed up by gasoline prices, which rose 1.7 percent. That was a much more mild increase than the 6 percent gain in February.

Still, higher prices at the pump present a risk for the economy because they sting consumers already suffering from a weak jobs market.

The underlying problem of inflation outstripping wage gains remains. That is the danger for the economy in the long run, said Joseph Trevisani, a market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.

Taking off some of the bite from high gasoline prices, electricity costs fell 0.8 percent in March, the steepest decline since June.

Food prices climbed 0.2 percent last month after being flat in February. Poultry prices posted their biggest gain since January 2008.

Overall consumer prices rose 2.7 percent year-on-year, down from a reading of 2.9 percent in February.

In the 12 months to March, core CPI increased 2.3 percent after rising 2.2 percent in February. This measure has rebounded from a record low of 0.6 percent in October.

(Reporting by Jason Lange; Editing by Neil Stempleman)

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