Consumer prices muted as housing starts reach 17-year low

WASHINGTON (Reuters) - The number of housing projects started last month fell to the lowest in 17 years, while consumer prices moved up a bit less than expected, leaving the Federal Reserve some room to lower interest rates to ward off a housing-led slowdown.

While the slide in the housing sector continued, industrial production unexpectedly rebounded as utilities raised output due to colder weather, making up for weak manufacturing growth.

The Commerce Department said on Wednesday that housing starts dropped 11.9 percent in March to an annual rate of 947,000 units, the slowest pace since March 1991 and well below the 1.02 million expected by economists.

"These housing starts suggest that the pace of decline is intensifying, which is the last thing the U.S. economy needs right now," said Stephen Malyon, senior currency strategist at Scotia Capital in Toronto.

Separately, the Labor Department said consumer prices rose 0.3 percent last month, slightly less than expected, after a flat reading in February. Stripping out food and energy, core prices, which also held steady in February, moved up an even milder 0.2 percent, restrained by a big drop in the cost of clothing.

U.S. stock prices shot higher at the open and U.S. government bond prices moved lower as investors saw the price data as leaving more room for the U.S. central bank to keep cutting interest rates to try to spur a slowing economy. The dollar lost ground on the prospect of more rate cuts, with the euro reaching a record high.

The Fed has lowered benchmark borrowing costs by 3 percentage points since mid-September, trying to ward off spreading weakness from the deep housing downturn and a related drying up of credit.

The housing data pointed to a continuing deterioration in the housing sector as building permits fell 5.8 percent to their lowest since April 1991, when the economy was in recession.

ENERGY PRICE PRESSURES

The report on consumer prices showed rising energy prices continuing to exert upward pressure on overall inflation.

Energy prices shot up 1.9 percent in March. The cost of gasoline, which hit record highs last month, rose 1.3 percent.

While financial markets initially greeted the consumer price data as providing greater scope for the Fed to lower interest rates, not everyone agreed. Over the past year, consumer prices have risen a sharp 4 percent on the back of surging energy costs.

"In spite of a benign core reading, the overall increase will persuade the Fed to be less aggressive in easing rates," said Richard DeKaser, chief economist at National City Corp in Cleveland.

Apparel prices slid 1.3 percent, helping restrain both overall and core inflation. Car prices slipped 0.1 percent.

But a range of other costs moved higher. The Labor Department's housing-cost gauge moved up 0.4 percent, reflecting a sharp gain in utility costs. A measure of owner-occupied housing costs not affected by energy rose 0.2 percent.

FACTORY ACTIVITY SLUGGISH

Separately, the Fed said output at the nation's mines, factories and utilities rose 0.3 percent in March after a downwardly revised drop of 0.7 percent in February. Wall Street economists had forecast a 0.1 percent decline after February's previously reported 0.5 percent fall.

Utility output climbed 1.9 percent after a 3.6 percent drop in February, while manufacturing production rose 0.1 percent after a 0.5 percent fall.

"Factory output was held down by a large decline in the output of motor vehicles and parts. A shortage of motor vehicle parts that resulted from a strike at a parts manufacturer idled a number of motor vehicle assembly plants," the Fed said in the report, referring to the seven-week-old walkout at American Axle & Manufacturing Holdings (AXL.N: Quote, Profile, Research).

The strike, which has partly or completely idled some 30 U.S. auto plants, lay behind a 5.4 percent fall in motor vehicle output. Excluding motor vehicles, factory production rose 0.4 percent.

The capacity utilization rate, a gauge of how busy the nation's industry was, edged higher to 80.5 percent from 80.3 percent, still well below levels that would be considered inflationary.