The U.S. manufacturing sector grew at its fastest rate in nearly seven years in February, while a gauge of inflation also rose, according to an industry report.

The Institute for Supply Management said its index of national factory activity rose to 61.4 in February from 60.8 in January, topping forecasts for 61.0. It was the highest level since May 2004.

A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion.

The report’s prices paid component rose to 82 from 81.5 the month before. Economists had expected a reading of 83.0. It was the nineteenth consecutive month the manufacturing sector has grown, outpacing other parts of the economy that continue to lag.

The manufacturing data echoed reports in the euro zone, Britain and India that also showed strong manufacturing growth as costs rose. But in China, factory growth slipped to its slowest pace in six months as authorities try to keep inflation in check.

“We will likely remain in a fairly strong growth environment from manufacturing activity at least through the near-term, but I don’t think we can dismiss the fact that these higher energy prices could crimp spending to some extent,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York.

“But at least in the near-term manufacturing is likely to hold up just given the fact that aggregate demand is starting to return.”

Concerns about inflation have grown amid political tensions in the Middle East and northern Africa that pushed the price of oil to its highest in 2-1/2 years last week.

Bernanke told the Senate Banking Committee the recent surge in oil prices is unlikely to have a big impact on the U.S. economy but could lead to weaker growth and higher inflation if sustained.

Separately, a report showed U.S. construction spending fell more than expected in January to its lowest level in five months. (Reuters)