Consumer prices and housing fan new economic fears

WASHINGTON (Reuters) - Consumer prices plummeted again at a record pace and groundbreaking on new homes slumped to a new low in November as the recession-hit economy lost momentum, government reports Tuesday showed.

The latest signs of economic distress came hours before Federal Reserve policy-makers slashed the official target for overnight interest rates to a record low zero to 0.25 percent and pledged to use "all available tools" to dispel recession.

Analysts had speculated the Fed might move boldly to ward off rising deflation risks and the U.S. central bank's sweeping action gave stock and bond markets a lift. The Fed also said it will buy more debt issued by government-sponsored mortgage agencies to boost the housing sector.

Earlier it appeared the economy was edging closer to a prolonged period of slumping prices as the economy shrinks.

"I think we're in a deflationary spiral that will probably go on until sometime next year," said Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. in New York. "I think it will probably go on through the majority of 2009."

The Labor Department said its closely watched Consumer Price Index dropped 1.7 percent after falling 1 percent in October -- back-to-back record drops since the department started keeping monthly data in 1947. Core prices, which exclude food and energy items, were flat in November after declining 0.1 percent in October.

On a year-over-year basis, core prices were up 2 percent in November, a level that normally would please U.S. central bank policy-makers, but prices still appear to be headed down.

The Commerce Department said housing starts dropped 18.9 percent to an annual rate of 625,000 units from 771,000 units in October, the lowest since the department started collecting monthly starts data in 1959, and well below the 740,000-unit pace that Wall Street analysts had expected.

"The housing starts data is another bad sign for the overall U.S. outlook," said Brian Dolan, chief currency strategist for Forex.com in Bedminster, New Jersey. "There's zero sign of any stabilization, dashing what had been some optimism that we were perhaps bottoming out."

By late afternoon following the Fed action, stock prices were up strongly, with the Dow Jones Industrial Average and the Nasdaq composite index both up more than 4.0 percent. Bond prices also shot up on the news that the Fed will consider outright purchases of Treasury debt in order to stimulate lending by keeping longer-dated interest rates low.

The Fed was clearly trying to counter the impact of a severe housing slump that has seen foreclosures soar and helped produce the worst financial crisis in decades. Many economists think the downturn was deepening as 2008 ends and that any recovery will be delayed past mid-2009.

The prices report showed that, on a year-over-year basis, consumer prices gained just 1.1 percent after a 3.7 percent increase in October. It was the smallest rise since mid-2002.

So far in 2008, overall consumer prices have risen at an annual rate of 0.7 percent, sharply lower than the 4.1 percent gain for all of 2007.

Energy prices plummeted 17 percent last month, double the 8.6 percent fall in October. It was the largest monthly decrease in energy prices since the department started monthly records in 1957.

Gasoline prices tumbled a record 29.5 percent on top of a 14.2 percent October drop and were 47 below the peak they hit in July. Natural gas prices fell for a fourth straight month, which may benefit consumers in the winter heating season.

But jobs still are disappearing at an accelerating pace and consumers are wary about spending amid reports that not only the U.S. but much of the global economy is in recession.

Food prices in November were up a relatively slight 0.2 percent after a 0.3 percent October rise. It was the smallest monthly gain in food costs since March.

The housing report also pointed to a protracted downturn for that hard-hit sector. New building permits, an indicator of builders' future plans, dropped 15.6 percent to 616,000 units from 730,000 units in October. That was also much below Wall Street analyst estimates of 700,000 and the lowest since records began in 1960.

(Additional reporting by Doug Palmer and Mark Felsenthal,)