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US May Housing Starts Rise; Inflation Remains Tame

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U.S. housing starts rose less than expected in May, likely reflecting labor and material constraints, but the overall trend remained consistent with strength in the housing market.

Meanwhile, U.S. consumer prices rose in May and a gauge of underlying price pressures showed signs of stabilizing after a long decline, a potential comfort to Federal Reserve policymakers who would like to see stronger inflation.

Though permits for future home construction fell, that followed a surge in April, which hoisted them above the 1 million-unit mark. The pullback last month reflected a drop in the volatile multi-family sector, but permits for single-family construction touched their highest level in five years.

The Commerce Department said on Tuesday housing starts rose 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April's starts were revised up to show a 856,000-unit pace instead of the previously reported 853,000 units.

Economists polled by Reuters had expected groundbreaking to rise to a 950,000-unit rate last month.

(Read More: Home Builder Confidence at 7-Year High)

Inflation Still Tame

Builders, who are ramping up construction to meet demand for housing against the backdrop very low inventory, have been complaining about labor shortages and increased material costs.

Sentiment among single-family home builders hit a seven-year high in June, a report showed on Monday, amid optimism over current and future home sales.

Lean inventories are pushing up home prices, which are in turn boosting consumer confidence and spurring consumption, helping soften the blow on the economy from tighter fiscal policy and slowing global demand.

The Federal Reserve has targeted housing as channel to boost growth, through monthly purchasesof $85 billion in government and mortgage-backed securities.

Though residential construction only accounts for about 2.5 percent of gross domestic product, housing has a wider reach on the economy. Analysts estimate that for every single-family home built, at least three jobs lasting for a year are created.

Starts are expected to top a one million-unit pace this year.

(Read More: Foreclosures Hasten as Home Prices Rise)

Last month, groundbreaking for single-family homes, the largest segment of the market, rose 0.3 percent to a 599,000-unit pace. Starts for multi-family homes increased 21.6 percent to a 315,000-unit rate.

Permits to build homes fell 3.1 percent last month to a 974,000-unit pace. Permits for multi-family homes dropped 10 percent to a 352,000-unit rate. Permits for single-family homes rose 1.3 percent to a 622,000-units, the highest since May 2008.

The Labor Department said on Tuesday its Consumer Price Index edged 0.1 percent higher, a slightly weaker gain than analysts polled by Reuters had expected.

But in a sign of stronger demand in the economy, consumer prices outside of food and energy rose 0.2 percent last month, just above the pace clocked in April.

These so-called "core" consumer prices, which U.S. central bankers monitor closely because they are less volatile, were up 1.7 percent in the 12 months through May. That matched the increase registered in April, and supported the view that a worrisome downward trend in core inflation, which began a year ago, might be coming to an end.

While May's reading for 12-month core inflation remains below the Fed's 2 percent inflation target, a stabilization could make the Fed more comfortable paring back its economic stimulus programs as soon as this year.

(Read More: Rising Rates Scaring Borrowers to Act)

In May, the gain in the core price index was supported by a 0.2 percent increase in clothing prices, as well as a strong 0.3 percent increase in shelter costs.

The Fed actually targets a separate but related measure of inflation published by the Commerce Department, known as the PCE index, which has shown even weaker levels of core price increases. The PCE index puts less weight on shelter, so Tuesday's data might not signal a similar stabilization in the core PCE index.

The Fed starts a two-day policy meeting on Tuesday.

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