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WASHINGTON (Reuters) - Consumer prices fell at a record pace in October and new-home building slumped to fresh lows, according to government reports on Wednesday that suggested the economy likely is already in a recession that may be long and deep.
A top Federal Reserve policy-maker played down risks that a deflationary spiral was near but conceded that at least a half year of economic contraction is likely. That would put the United States into recession with Japan and much of Europe.
"We have a very weak economy," Fed Vice-Chairman Donald Kohn told reporters after a speech to a Washington think-tank. "My most likely outcome is for a couple of quarters of negative growth, and inflation coming down, but not getting to that deflationary state."
The Consumer Price Index plunged 1.0 percent in October, its biggest drop since the Labor Department began monthly records in 1947. Core prices, excluding food and energy items, fell 0.1 percent -- the first fall in more than a quarter of a century as prices for gasoline and all energy-related products fell.
"That decline seems to be due to the impact of the economic downturn, particularly the weakness of consumption, and the first pass-through effects of the commodity price slide," said Paul Ashworth, senior U.S. economist for London-based Capital Economics.
The latest set of bad data depressed stock prices and sent investors scurrying for safer-haven debt securities.
The Dow Jones industrial average lost 5.1 percent to end at 7,997.28 while the Nasdaq Composite Index slid 6.5 percent to 1,386.42.
Prices for 30-year U.S. Treasury bonds soared three full points, and the yield fell to 3.94 percent, the lowest in more than three weeks.
Collapsing commodity prices have driven earlier worries about inflation to the back burner but fanned speculation about potential for a deflationary spiral in which consumers stop spending and companies restrict investment because they are waiting to see how far prices drop.
Japan experienced a so-called "lost decade" in the 1990s when its economy suffered under those circumstances, and the Fed's Kohn said that mustn't happen. "I think that were we to see this possibility, that we should be very aggressive with our monetary policy, as aggressive as we can be," he said.
On Tuesday, Britain announced annual consumer inflation fell for the first time in more than a year in October and at the fastest pace since the series began. The U.K. Office for National Statistics said inflation slowed to 4.5 percent in October from 5.2 percent the previous month.
Long-standing problems in the housing sector, widely considered to be at the heart of the U.S. economy's woes, were further highlighted by a bleak Commerce Department report on new-home starts in October.
Housing starts fell 4.5 percent last month to a seasonally adjusted annual rate of 791,000 units and building permits -- which signal future building intentions -- dropped even more dramatically by 12 percent to 708,000.
Another report from the Mortgage Bankers Association showed applications for U.S. home mortgages fell last week, with loans for purchases of single-family homes falling to their lowest in nearly eight years, an industry group said. The lobby group's mortgage application index fell 6.2 percent.
The Federal Reserve has already cut U.S. official interest rates by 4.25 percentage points to 1.0 percent in 2008 to combat the credit crisis and support the faltering economy.
Kohn said the U.S. central bank may have to consider more "quantitative easing" by flooding markets with funds to try to jump-start spending and investment.
The Labor Department said energy prices dropped 8.6 percent in October, after declines of 3.1 percent in August and 1.9 percent in September. October's was the biggest drop since the department began keeping seasonally adjusted energy prices in 1957.
Gasoline prices plunged 14.2 percent in October, also a record drop. Gasoline prices are expected to drop again in November, with the latest weekly government data showing retail gasoline at $2.13 a gallon, sharply below the $3.54 a gallon at the beginning of October.
New-vehicle prices dropped 0.5 percent last month after falling 0.7 percent in September -- adding to the distress that automakers feel as they plead for government money to tide them over a period when they say buyers can't get loans to buy new cars.
Food costs were up 0.3 percent in October, half the 0.6 percent rise posted in September.
On a year-over-year basis, the Consumer Price Index rose 3.7 percent, the smallest increase in a year.
Reporting by Glenn Somerville, editing by Neil Stempleman