* U.S. consumers prices gain in Feb, ease deflation fears
* Current account deficit narrowed sharply in Q4
* Mortgage applications surged last week
By Lucia Mutikani
WASHINGTON, March 18 (Reuters) - U.S. inflation rose in February on higher gasoline and apparel prices, government data showed on Wednesday, pointing to some pricing power in the recession-hit economy and easing fears of deflation for now.
The Labor Department said its closely watched Consumer Price Index rose 0.4 percent, the biggest monthly gain since last July, after increasing 0.3 percent in January.
It said about two-thirds of the rise in the headline figure was from the jump in gasoline prices.
"The one-time shock from lower commodity prices and stronger dollar late last year has faded. We haven't slipped into a worrisome deflation situation," said Zach Pandl, an economist at Nomura Securities International in New York.
At the same time, he said, the data did not point to a resurgence in inflation.
U.S. equity index futures held their losses, while the U.S. dollar extended gains versus the euro after the data.
The data came ahead of the Federal Reserve's announcement of its decision on monetary policy later on Wednesday. The Fed is expected to leave the target for its benchmark overnight funds rates unchanged at zero-0.25 percent.
But the statement accompanying the decision will be watched for indications on whether the Fed will start buying Treasuries to damp down interest rates and help revive an economy in recession since December 2007.
Core prices, which exclude food and energy items, increased 0.2 percent in February after rising by the same margin the prior month.
On a year-over-year basis, consumer prices were up 0.2 percent after being flat in January. Energy prices surged 3.3 percent in February, also the largest monthly increase since July last year, while gasoline was up 8.3 percent.
However, compared to the same period last year, energy prices were down 18.5 percent, the department said.
Apparel prices jumped 1.3 percent, the biggest rise since a 1.5 percent gain in March 1990. New vehicle prices rose 0.8 percent, the largest advance since November 2004.
Rising unemployment is undermining consumer demand and eroding pricing power for many companies. That has raised fears that the economy could be heading into deflation.
Deflation is a broad-based decline in prices that can undercut an economy by leading consumers to hold off purchases in the hopes of even lower prices, creating a precarious spiral. Falling prices also raise the real burden of debt.
Data on Tuesday showed the producer price index, a gauge of prices received by farms, factories and refineries, increased just 0.1 percent last month versus January's gain of 0.8 percent.
The slump in domestic demand is crimping appetite for imports.
The Commerce Department said the U.S. current account deficit narrowed sharply in the fourth quarter to $132.8 billion, the smallest since the fourth quarter of 2003, as U.S. imports plunged more than exports.
The deficit shrank from an upwardly revised estimate of $181.3 billion for the third quarter.
The fourth-quarter deficit equaled 3.7 percent of gross domestic product, down from 5.0 percent in third quarter and the lowest since 3.4 percent in fourth quarter 2001.
A separate report showed U.S. mortgage applications surged in the latest week, driven by a spike in demand for refinancing as the average rate on 30-year fixed-rate home loans fell.
Refinancing applications jumped 30 percent in the week ended March 13 as the borrowing rate dipped 0.07 percentage point to 4.89 percent, tying the record low reached in early January in a survey that dates to 1990.
The MBA's market index, which includes both purchase and refinance loans, jumped 21.2 percent to 876.9, the highest since mid-January.
(Additional reporting by Doug Palmer in Washington and Lynn Adler and Richard Leong in New York; Editing by Andrea Ricci)