* Housing starts jump 15.7 percent in July
* Permits increase 8.1 percent
* Consumer price index up 0.1 percent; Core CPI up 0.1 percent
WASHINGTON, Aug 19 (Reuters) - U.S. housing starts rebounded strongly in July, pointing to momentum in the economy, but a moderate increase in consumer prices suggested the Federal Reserve has room to keep interest rates low for a while.
Groundbreaking surged 15.7 percent last month to a seasonally adjusted annual 1.09-million unit pace, the Commerce Department said on Tuesday, snapping two straight months of declines.
Economists had forecast starts to rise to a 969,000-unit rate in July.
The housing market is regaining its footing after being slammed by last year's run-up in interest rates. A shortage of properties for sale has also lifted prices, pushing housing out of the reach of many first-time buyers.
In a separate report, the Labor Department said its Consumer Price Index edged up 0.1 percent last month as declining energy costs partially offset increases in food and rents. The CPI had increased 0.3 percent in June.
In the 12 months through July, the CPI increased 2.0 percent after advancing 2.1 percent in June.
Stripping out food and energy prices, the so-called core CPI ticked up 0.1 percent after a similar gain in June. In the 12 months through July, the core CPI increased 1.9 percent after rising by the same margin in June.
Inflation edged up a bit from March through June, but labor market slack, marked by tepid wage growth, is keeping a lid on price pressures.
"The housing market's recent weakness appears to be reversing while the labor market appears to be improving. And all of this comes with only modestly building inflationary pressures," said Dan Greenhaus, chief strategist at BTIG in New York.
"As such, we think the Fed will find these data further supportive of the go-it-slow approach to exiting its accommodative policies."
Most analysts expect the U.S. central bank to hold its benchmark overnight interest rate steady until the first half of 2015. It has kept that rate near zero since December 2008 while nursing the economy back to health.
The Fed targets 2 percent inflation and it tracks an index that is running even lower than the CPI. Last month, it said the risk of inflation running persistently below its target had diminished somewhat.
Prices for U.S. Treasuries slipped while U.S. stock futures extended gains after the data. The U.S. dollar was stronger against a basket of currencies, hitting a nine-month high against the euro.
Home Depot shares were 3.5 percent higher at one point in pre-market trading after the home improvement retailer's second-quarter earnings and revenue topped Wall Street expectations and it raised its full-year profit forecast. ID:nL4N0QP38J
Home Depot's main rival, Lowe's Cos Inc, is scheduled to report its second-quarter earnings on Wednesday.
Groundbreaking for single-family homes, the largest part of the market, increased 8.3 percent in July to a 656,000-unit pace. Single-family starts in the U.S. South rebounded 16.9 percent last month after dropping sharply in June.
Starts for the volatile multi-family homes segment jumped 33 percent to a 423,000-unit rate, the highest level since January 2006. This market segment is being buoyed by a shift towards renting, as many prospective buyers give up on the dream of owning a house.
The government reported last month that the homeownership rate hit a 19-year low in the second quarter, while the rental vacancy rate was the lowest in more than 19 years.
Housing permits rose 8.1 percent to a 1.05-million unit pace in July. Economists had expected them to rise to a 1.0-million unit pace. Though permits are now slightly lagging starts, a survey on Monday showed confidence among single-family home builders hit a seven-month high in August, which bodes well for groundbreaking in the months ahead.
Permits for single-family homes increased 0.9 percent to a 640,000-unit pace. Permits for multi-family housing soared 23.6 percent to a 382,000-unit pace.
(Reporting by Lucia Mutikani; Editing by Paul Simao)