WASHINGTON U.S. core consumer inflation touched a record low in October and new home building sagged, lending support to the Federal Reserve's move to boost the sluggish economy through additional monetary easing.
The data on Wednesday could help ease criticism of the Fed's November 3 decision to pump more money into the economy through purchases of $600 billion worth of government debt.
"The reports really indicate why the Fed sees the need to ease (monetary policy) further. They stress the downside risks to the economy," said Zach Pandl, a U.S. economist at Nomura Securities International in New York.
The Consumer Price Index rose 0.2 percent last month after edging up 0.1 percent in September, the Labor Department said. Economists had expected a 0.3 percent gain.
Excluding food and energy costs, prices were flat for a third straight month and the increase from a year ago of 0.6 percent was the smallest since records started in 1957.
A separate report from the Commerce Department showed housing starts plummeted 11.7 percent to a 519,000 unit annual rate, the lowest since April 2009 and well below the 600,000 economists had projected.
Weak inflation as the economy recovers moderately from the worst recession since the 1930s lifted prices for U.S. Treasury debt, while the dollar fell against the euro and stayed close to a six-week high against the yen.
Stocks on Wall Street were mostly higher, but investors were awaiting clarity on how a European Union-International Monetary Fund mission would solve Ireland's debt crisis.
Sovereign debt problems in some European countries weighed on the U.S. economy's recovery earlier this year. Data outside the housing market so far suggests the economy found some strength as the fourth quarter started, but investors are keeping a wary eye on developments in Ireland.
Signs of some improvement are also emerging at the corporate level, with retailers growing optimistic on holiday sales.
Discount chain Target Corp (TGT.N) offered an upbeat fourth-quarter sales forecast on Wednesday, while earlier this week top retailer Wal-Mart Stores (WMT.N) said holiday sales would break a six-quarter streak of U.S. same-store sales declines.
But much of the anticipated sales gains will be the result of price cuts. This implies inflation will remain low, though economists do not foresee an outright deflation.
A government report on Tuesday showed core producer prices last month recorded their biggest decline in more than four years as vehicle prices tumbled.
"These price reports suggest that market fears about a potential outbreak of inflation from the Fed's recent moves are massively overblown and are completely out-of-sync with the reality," said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts.
The U.S. central bank's decision to launch another round of large-scale bond buying, a policy known as quantitative easing -- or QE2 as analysts call it -- is intended to prevent prices from spiraling down further.
It has been sharply criticized both at home and abroad for risking inflation and devaluing the dollar, prompting Fed Chairman Ben Bernanke to defend the program before lawmakers on Wednesday.
Despite the uproar, economists do not expect the Fed to change course and St. Louis Fed Bank President James Bullard told reporters on Wednesday the central bank was likely to follow through on the entire bond purchasing program.
The 0.6 percent reading on core inflation is way below the Fed's comfort zone of between 1.7 percent and 2 percent.
In October, overall consumer prices were lifted by a 4.6 percent jump in gasoline prices, which built on a September increase of 1.6 percent. Food prices rose by a muted 0.1 percent after gaining 0.3 percent in September.
New motor vehicle prices, which depressed core wholesale prices in October, contributed to holding down the core CPI number, as well. New vehicle prices fell 0.2 percent, while the cost of used trucks dropped 0.9 percent.
Shelter costs edged up 0.1 percent, while apparel fell 0.3 percent in October.
(Additional reporting by Glenn Somerville; Editing by Neil Stempleman)