* Consumer prices fall 0.2 percent in March
* Prices up 1.5 pct from year-ago, smallest rise in 8 months
* Core CPI gains 0.1 percent, up 1.9 percent from year-ago
* Factory output slips 0.1 percent, industrial production up
* Housing starts rise 7 percent, permits fall 3.9 percent
By Lucia Mutikani
WASHINGTON, April 16 (Reuters) - U.S. consumer prices fell in March for the first time in four months and factory output slipped, strengthening the argument for the Federal Reserve to maintain its monetary stimulus to speed up economic growth.
Other data on Tuesday suggested the housing market recovery was losing momentum, even though housing starts breached the 1-million unit rate mark for the first time since June 2008.
“For the Fed, it’s business as usual,” said Millan Mulraine, senior economist at TD Securities in New York. “There is not likely to be an acceleration in growth momentum that would cause them to shift their policy stance anytime soon.”
The Labor Department said its Consumer Price Index edged down 0.2 percent last month as gasoline prices tumbled, unwinding some of February’s 0.7 percent increase. Economists had expected a flat reading.
Underscoring the benign inflation environment, consumer prices rose just 1.5 percent in the 12-months through March — the smallest increase since July. Prices had increased 2.0 percent year-on-year in February.
Stripping out volatile energy and food costs, the so-called core CPI was up only 0.1 percent after gaining 0.2 percent in February. That lowered the 12-month increase to 1.9 percent in March from 2.0 percent in February.
A separate report from the Fed showed output at the nation’s factories decreased 0.1 percent after advancing 0.9 percent in February. The decline was fairly broad-based, with output dropping for primary metals and electronics. Automobile assembly, however, increased.
Despite the factory weakness, overall industrial production rose 0.4 percent last month due to a jump in utilities’ output.
Stocks on Wall Street were trading higher as strong earnings from Coca-Cola and Johnson & Johnson buoyed investor sentiment. U.S. Treasury debt prices fell, while the dollar weakened against a basket of currencies.
Economic data for January and February have suggested growth accelerated in the first quarter after activity almost stalled in the final three months of 2012.
But in a replay of the prior two years, the economy appears to have hit a speed bump at the end of the quarter, with data ranging from employment to retail sales and manufacturing weakening significantly in March.
Much of the weakness is blamed on higher taxes and deep government spending cuts put in place in Washington.
“We definitely see the second quarter slowing from the first in terms of overall growth across many of the sectors. Obviously, the drag from fiscal policy is playing into this a little bit,” said Erik Johnson, a senior U.S. economist at IHS Global Insight in Lexington, Massachusetts.
The lack of inflation and slowing economic growth bolster the case for the Fed to remain on its very easy monetary policy path, despite divisions among policymakers over the wisdom continued asset purchases.
Minutes of the Fed’s March 19-20 meeting published last week suggested the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds meant to keep interest rates low and spur faster job growth.
On Tuesday, New York Federal Reserve Bank President William Dudley cautioned against pulling back too soon, pointing to the sharp moderation in the pace of job growth in March.
“I’d note that we saw similar slowdowns in job creation in 2011 and 2012 after pickups in the job creation rate and this, along with the large amount of fiscal restraint hitting the economy now, makes me more cautious,” he told the Staten Island Chamber of Commerce.
A third report from the Commerce Department showed housing starts rose 7.0 percent last month to a 1.04 million-unit annual rate, the highest in nearly five years.
However, the increase was driven by the volatile multi-family sector, while groundbreaking for single-family units fell. In addition, permits for future construction tumbled 3.9 percent — reversing February’s gain.
That suggested a slowdown in housing activity, coming on the heels of a report on Monday that showed a third straight monthly decline in homebuilders’ confidence in April.
“The decline in single starts and permits is consistent with recent hints the housing recovery has lost some momentum,” said David Sloan, senior economist at 4Cast Ltd in New York.