New-Home Construction Hits
12-Year Low, Permits Fall

U.S. consumer prices were under wraps last month on falling energy and apparel prices and tame housing costs, giving Federal Reserve officials some measure of support for their surprisingly aggressive rate reduction Tuesday.

Meanwhile, home builders slowed construction to the lowest rate in 12 years during August, and permits for future groundbreakings also fell, suggesting a continuing U.S. housing slump.

The consumer price data, which come on the heels of a steep drop in August wholesale prices, suggests that underlying inflation worries shouldn't stand in the way of future rate cuts, either, if the economic outlook erodes.

The consumer price index fell 0.1% in August, the Labor Department said Wednesday, its first decline since October 2006. The CPI rose 0.1% in July. The core CPI, which excludes volatile food and energy prices, advanced 0.2%, though it was nearly rounded down to 0.1%.

Unrounded, the CPI fell 0.139% last month. The core CPI advanced 0.150% unrounded. Wall Street economists had expected no change in overall consumer prices and a 0.2% rise in the core index.

Overall consumer inflation was up 2% from a year ago. The core CPI was up 2.1% compared to the same month a year ago, down slightly from July and matches the lowest annual rate since September 2005.

That is near the 2% top end of the Federal Reserve's assumed comfort zone for annual core inflation. The Fed's preferred gauge, the core price index for personal consumption expenditures, is within that zone at 1.9% annual growth through July.

On Tuesday, the Fed lowered the fed funds rate for the first time in more than four years to stem the effects of a housing and credit crunch, by a half percentage point to 4.75%, even though officials cautioned that "some inflation risks remain" and that they "will continue to monitor inflation developments carefully."

However, some economists took that inflation warning as an empty threat given the size of the rate cut.

Energy prices last month decreased 3.2% compared to July, according to Wednesday's report. Gasoline prices fell 4.9%. Electricity prices were unchanged. Food prices, in contrast, increased 0.4%.

Medical care prices, meanwhile, rose 0.5%. Clothing prices fell 0.5%.

Housing, which accounts for 40% of the CPI index, was flat. Rent climbed by 0.2%, as did owners' equivalent rent. Lodging away from home fell 0.6%.

In a separate report, the Labor Department said the average weekly earnings of U.S. workers, adjusted for inflation, increased 0.5% in August. Average hourly earnings increased 0.3%, and average weekly hours were flat.

Housing Starts Drop

Housing starts declined 2.6% to a seasonally adjusted 1.331 million annual rate, after falling 6.9% in July to 1.367 million, the Commerce Department said Wednesday. Originally, Commerce reported July starts 6.1% lower at 1.381 million.

The median forecast of 23 economists surveyed by Dow Jones Newswires was a 3.7% drop to a 1.330 million annual rate. August's retreat, carrying starts to their lowest since 1.281 million in June 1995, was reported a day after the Federal Reserve made a surprisingly aggressive cut in interest rates, saying tightening credit could worsen the housing slump and restrain the economy.

The housing sector has been on a slide for a long time. Year over year, housing starts were 19.1% below the level in August 2006.

The mood of home builders hit bottom this month, a report Tuesday indicated. The National Association of Home Builders' index for sales of new, single-family homes decreased to 20 from 22 in August, tying a record low set in January 1991.

Builders have plenty to feel bad about: sales have plunged, mortgage rates have gone up, credit has tightened, and cancellations of new-home contracts have increased, adding to already-bloated inventory.

"It is hardly surprising that builder sentiment is very poor," MFR Inc. economist Joshua Shapiro wrote in a note to clients about the NAHB report. "We look for activity levels to continue to slide in the months ahead and for pricing to erode further."

As an omen, Wednesday's housing starts data showed building permits tumbled 5.9% to a 1.307 million annual rate in August. Economists had expected permits to drop 3.4% to a rate of 1.342 million. July permits fell 1.7% to 1.389 million. Permits, of course, are an indicator of future building activity.

August single-family housing starts tumbled 7.1% to 988,000, the lowest level since March 1993. Construction of housing with two or more units increased 12.8% to 343,000; within that category, groundbreakings of homes with five or more units -- or multi-family -- were 16.5% higher.

Regionally, housing starts decreased by 37.7% in the Northeast and 18.4% in the West. Starts increased by 11.4% in the South and 4.2% in the Midwest.

Nationwide, an estimated 119,200 houses were actually started in August, based on unseasonally adjusted figures. An estimated 120,900 building permits were issued last month, also based on unadjusted figures.

-- Jeff Bater contributed to this article.

Email your comments to rjeditor@dowjones.com.