WASHINGTON—U.S. consumer inflation dipped unexpectedly last month thanks to falling gasoline prices while new home construction hit a 12-year low as the housing slump continued to dim the outlook for growth.
Ground-breaking on new U.S. homes fell 2.6 percent last month to the lowest level since mid-1995, the Commerce Department said on Wednesday, while building permit activity, a sign of future construction plans, also dropped to a 12-year low.
"Today's housing report again indicates that deteriorating fundamentals are continuing to depress housing activity and prospects for a recovery this year have faded," Gary Bigg, an economist with Banc of America Securities, said in a note.
Stocks rallied on the weaker-than-forecast inflation data, which analysts said supported the aggressive interest rate cut by the U.S. Federal Reserve on Tuesday. However, U.S. government debt prices slipped as investors fretted whether the rate cut might stoke future price pressures.
Policy-makers worry that the weak housing sector could undermine consumer spending. Fresh mortgage application data showed home owners who are facing steep mortgage payment increases were rushing to refinance at more affordable rates.
The Mortgage Bankers Association said applications rose for a third straight week and its seasonally adjusted index for applications is now at the highest level since mid-May.
Five million U.S. households have adjustable rate mortgages which will re-set in the next 18 months, some of them at much higher levels, prompting fears of soaring home-loan foreclosures that might tip the U.S. into a recession.
Inflation Down
The Fed lowered overnight borrowing sharply to forestall the risk of a steep slowdown, but signaled that it was not necessarily embarking on a prolonged period of interest rate cuts by warning inflation remained a concern.
The August Consumer Price Index fell 0.1 percent, helped by lower energy costs to post the first decline since October, the Labor Department said. Economists polled by Reuters had forecast CPI, the government's key gauge of inflation, to be unchanged after a 0.1 percent gain in July.
Core inflation, which excluding volatile food and energy prices, rose 0.2 percent last month, matching the forecast and July's rise.
"While tight labor markets and the potential pass-through of elevated food and energy prices continue to pose some inflation risk, we still believe that core inflation will show a bit of moderation in coming months," Morgan Stanley economists David Greenlaw and Ted Wiesman wrote in a note.
Economists said a precise reading of core inflation's change, up a mild 0.1503 percent, endorsed the Fed's move.
"Core CPI came in at a low 0.2% and will help to alleviate concerns that the Fed has taken major risks with its inflation objectives," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
"On the face of it, it helps support (Fed Chairman Ben) Bernanke's credibility," he said.
Gasoline fell 4.9 percent in August, the biggest drop since October, although Tuesday's spike in oil prices to a record above $82 a barrel was a warning that these benefits may be fleeting.
Looking at longer time-frame, consumer prices in the 12 months since August 2006 were up 2.0 percent while core CPI gained 2.1 percent, their slowest pace since March 2006.
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