Instant View: Core inflation lowest on record

NEW YORK (Reuters) - Core U.S. consumer prices rose at its slowest rate on record, data showed on Wednesday, further supporting the Federal Reserve's decision to ease monetary policy.

HOUSING STARTS:

Starts on new homes slumped to the lowest in 1-1/2 years in October, mainly due to sharply reduced building of multiunit homes, according to a government report on Wednesday that underlined the strains facing the sector.

KEY POINTS: * The Labor Department said its Consumer Price Index increased 0.2 percent last month, as energy costs rose, after edging up 0.1 percent in September. October's increase was below economists' expectations for a 0.3 percent gain. * Excluding volatile food and energy prices, core CPI was flat for a third straight month in October and the annual increase of 0.6 percent was the smallest since records started in 1957, the department said. * Economists polled by Reuters had expected core CPI to edge up 0.1 percent in October and the year-on-year rate to rise 0.7 percent after a 0.8 percent increase in September * Housing starts fell 11.7 percent in October to a seasonally adjusted annual rate of 550,000, the Commerce Department said. * It was the weakest starts rate since 477,000 in April 2009 when the economy was still struggling with the impact of the 2007-2008 financial crisis.

COMMENTS:

ROBERT DYE, SENIOR ECONOMIST, PNC FINANCIAL SERVICES, PITTSBURGH:

HOUSING STARTS: "Housing starts? Well they didn't. It was an absolutely abysmal number. If you dig a bit, the multifamily side is much weaker. It's fading away here. You have to look at builder confidence which has been hurt by high unemployment and little job movement, and potential buyers are concerned about purchasing a new home. There are also concerns about this 'shadow inventory.' Right now no one wants to sit on inventories of unsold homes. The key is job creation.

CPI: "We did see a pop in energy prices which we could trace back to quantitative easing, which lowered the dollar. Now we are seeing problems in the euro zone especially with Irish banks and renewed stress on Greece, Spain and Portugal. That's bringing the euro back down.

"I'm not overly concerned by energy prices because we should see some of that given back by the end of the year.

Core inflation from this report is well below the Fed's comfort zone between 1 and 2 percent. The effect of quantitative easing is to unhinge inflation expectations and generate some inflation. The economy could afford that right now. Low inflation is not a problem and deflation is, and we are closer to that, which something we want to avoid."

STEVEN RICCHIUTO, US ECONOMIST, MIZUHO SECURITIES, NEW YORK

"The housing starts number wakes people up the reality that the housing industry isn't out of the woods.

"A lot of impact was in multi-family homes which has really been the area that has provided support to the housing market over the past few years, but I think we've overbuilt that area and its in need for an adjustment.

"The single family can't gain any momentum. Building permits numbers-there are no big bleed downs shown anywhere in these housing numbers and I think that's critical, we're starting to get the sense that maybe housing starts have bottomed out, and now we're lower than we were a year ago this time.

"CPI, the big news there is the continued downward adjustment in the core. This makes the Federal Reserve justified in the QE2, they are worried about inflation getting too low. This sets the stage for another possible downdraft in the core personal consumption expenditure numbers that come out in a few weeks.

"They are worried about the deflation risk and they are real, they are in the data." NICHOLAS COLAS, CHIEF MARKET

STRATEGIST, THE CONVERGEX GROUP, NEW YORK:

"The only number that I was focusing on was the CPI given how disappointing the PPI (Producer Price index) was yesterday. I guess looking at these two numbers you get a sense of what the Fed was looking at when it made the QE2 decision because it certainly wasn't the labor market because we got some pretty good news on that last week. It certainly is these inflation numbers or lack thereof."

LINDSEY PIEGZA, ECONOMIST, FTN FINANCIAL, NEW YORK

"Pretty ugly housing starts this morning. Much worse than we expected, especially with the downward revision. This doesn't give us too much of a move out of a range we've been used to but it certainly sends a momentary panic to the market.

"Just as we see upward momentum one month, it's really retracted the following month.

"As far as the CPI, a nice, very benign inflation report. very much in line with the Fed policy initiatives suggesting that inflation right now is not a concern. This again gives them momentum to support their policies amid rising criticism.

"Here, we see that inflation is very much under control and the Fed can continue to focus on what they deem is the most appropriate policy measure."

DAVID RESLER, CHIEF ECONOMIST, NOMURA SECURITIES, NEW YORK

"The CPI, obviously, a bit of a surprise to the downside, underscoring the legitimacy of concerns at the Federal Reserve that we face a serious threat of drifting into deflation."

OMER ESINER, CHIEF MARKET ANALYST, COMMONWEALTH FOREIGN EXCHANGE, WASHINGTON:

"CPI is mildly dollar negative, and with year-over-year CPI at its lowest on record, that suggests there will be little inflationary pressure. Together with yesterday's core PPI, it shows there's a greater risk of deflation than inflation. The Fed isn't likely to rethink it's asset purchase program or end it sooner than expected.

"Having said that, the story in Europe and the fact that U.S. yields have moved higher lately is offsetting this and that's why the dollar is holding up pretty well. If we get a resolution to Ireland's problems, you could see the euro bounce. But the overall bias is to the downside, given uncertainty about not just Ireland but Portugal and Spain. Near-term, it has sold off a lot, but my best bet is it ends the year in the low $1.30s."

MARKET REACTION: Stock index futures added to gains Bonds rebounded from losses The dollar slipped against the euro and yen