Consumer Prices Decline Unexpectedly in August

U.S. consumer prices unexpectedly dipped 0.1 percent last month and new home construction hit a 12-year low, data Wednesday showed, underlining concerns about the country's economic outlook.

August consumer prices were pushed lower by slumping energy costs and posted their first decline since October, the Labor Department said, while core inflation rose as expected.

"That's good news considering the cut in the fed funds rate yesterday. It was supportive of what the Fed did yesterday,"said Richard Huber, an economist at A.G. Edwards and Sons.

Inflation is under scrutiny by the Federal Reserve, which on Tuesday slashed interest rates by a half percentage point to 4.75 percent to shield the economy from the housing market slump, but also warned it was monitoring price pressures.

Stock futures added to gains on the weaker-than-forecast inflation data, while U.S. government debt prices were steady at lower levels. The dollar was also steady after the reports.

Analysts polled by Reuters had forecast the closely watched consumer price index, the government's key gauge of inflation, to be unchanged in August after a 0.1 percent gain in July.

Excluding volatile food and energy price, core inflation advanced 0.2 percent last month matching the forecast and July's rise, the Labor Department said.

But calculating core inflation's change more precisely showed its gain remained a mild 0.1503 percent.

"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.

Lower Energy

Energy prices fell 3.2 percent in August, the biggest drop since October, while food prices rose 0.4 percent, partly on a big increase in dairy products.

However, U.S. oil prices topped a fresh record above $82 a barrel on Tuesday, in a warning that rising fuel costs may yet pressure inflation.

Consumer prices in the 12 months since August 2006 were up 2.0 percent while core CPI gained 2.1 percent. These results compare with a forecast for a 2.1 percent year-on-year rise in headline CPI and 2.2 percent increase in core.

Housing Woes

The Fed cut borrowing costs partly in response to fallout from the slumping housing market and August housing starts confirmed that the sector remained in trouble.

U.S. home construction fell 2.6 percent last month to their lowest in more than 12 years, while building permit activity, a sign of future construction plans, also dropped to a low not seen since mid-1995.

The Commerce Department said housing starts set an annual pace of 1.331 million units in August, slightly lower than the 1.35 million units expected by economists and the revised pace of 1.367 million rate for July. It was the lowest pace for housing starts since the June 1995 rate of 1.281 million units.

Building permits fell 5.9 percent to an annual rate of 1.307 million, also the lowest since June 1995 when they reached 1.305 million. Economists polled by Reuters had forecast August permits at 1.35 million after the 1.389 million rate of July.

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