Housing starts skid, inflation flares

By Patrick Rucker

WASHINGTON (Reuters) - Groundbreaking for new U.S. homes and permits for future building both hit a 14-year low last month, reviving worry about a deepening housing slump and prompting investors to boost bets on interest-rate cuts.

Housing starts tumbled 10.2 percent to a 1.191 million unit annual rate, the slowest since March 1993, the Commerce Department said on Wednesday. Economists had expected starts to slip, but the sharpness of the downturn took them by surprise.

"There is no end in sight," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "The builders didn't realize how many cancellations they are going to face. If we hit 1.0 million start range, it's consistent with recessions in the past. And we are heading in that direction."

The dour report pushed up prices for bonds and weighed on the dollar as traders saw greater likelihood the Federal Reserve would follow up a rate cut it made last month with another at its next meeting on October 31.

A separate report, however, showed the economy facing inflation pressure from food and energy, which could complicate the Fed's thinking on borrowing costs.

The Labor Department said the Consumer Price Index, the most broadly used gauge of inflation, rose 0.3 percent last month, the biggest gain in four months. However, the core rate, which excludes energy and food, moved up a modest 0.2 percent.

"The housing starts and consumer price inflation numbers highlight the tough dilemma the Federal Reserve faces," said Bernard Bauhmohl, managing director of the Economic Outlook Group in Princeton Junction, New Jersey.

"Both of its mandates --- averting recession and controlling inflation --- are now being challenged," he said.