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Housing construction plunges to lowest level in 14 years, consumer prices edge up

WASHINGTON — Problems in the housing industry intensified last month with construction of new homes plunging to the lowest level in 14 years. Consumer prices, meanwhile, rose at the fastest pace in four months, reflecting higher energy and food costs.

The Commerce Department reported Wednesday that construction of new homes fell 10.2 percent last month, compared to August, to a seasonally adjusted annual rate of 1.191 million units. That was the slowest building pace since March 1993 and was far bigger than the 4.2 percent decline that economists had been expecting.

Meanwhile, the Labor Department reported that consumer prices rose by 0.3 percent in September, slightly more than the 0.2 percent analysts had been expecting as energy prices rose after three straight declines and food costs shot up at the fastest pace since June.

Core inflation, excluding energy and food, remained tame, however, rising by 0.2 percent, in line with expectations.

Analysts said the bigger-than-expected drop in housing construction could be signaling that the housing downturn, already the worst in 16 years, may be headed for bigger troubles. Housing activity is now 30.8 percent below the level of a year ago.

"The contraction in housing is transitioning from an average downturn to among the worst in the post-World War II history. As the current downturn probes deeper depths, the risk of an outright recession will mount," said Michael Gregory, an economist with BMO Capital Markets.

Housing sales, which had set records for five straight years, have been slumping since 2006. That decline has intensified in recent months as mortgage lenders have tightened standards for giving loans in response to soaring defaults. The higher defaults and the inability of prospective buyers to qualify for mortgages have contributed to record high levels of unsold new and existing homes.

Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson warned this week that the housing downturn was likely to persist longer than had been expected.

The National Association of Homebuilders reported Tuesday that its index of builder confidence fell for the eighth consecutive month in October, pushing the index to a record-low of 18 from a reading of 20 in September.

Many economists believe that housing will trim economic growth by more than a percentage point in the current quarter. However, they also think the country will avoid a recession because they believe the Federal Reserve will cut interest rates further should there be more signs that the housing downturn is effecting the overall economy

Applications for building permits, considered a good sign for future activity, also fell sharply in September, dropping by 7.3 percent to 1.226 million units, also the weakest pace in 14 years.

Only the Northeast showed construction gains in September with activity rising by 45.4 percent in that region. Construction starts fell by 10.1 percent in the West, 11.7 percent in the South and 28.4 percent in the Midwest.

The 0.3 percent increase in consumer prices in September was the largest rise since a 0.7 percent surge last May, when energy prices were soaring.

Energy costs were up 0.3 percent in September following three straight monthly declines. Gasoline costs rose 0.4 percent, the biggest increase since May, while heating oil costs were up 0.9 percent. Analysts are forecast that energy prices will rise even further in the months ahead, reflecting the fact that oil prices have been trading at record highs above $88 per barrel.

Food costs jumped by 0.5 percent last month, the largest increase since a similar rise in June. The higher prices were led by a 13.1 percent surge in the cost of dairy products and a 7.2 percent increase in poultry prices. The cost of fresh fruits, beef and pork were also up. Vegetable prices, however, fell by 4 percent in September.

The 0.2 percent increase in core inflation, which excludes energy and food, matched the gains of the past three months.

Airline ticket prices rose 1.1 percent in August, while clothing costs were up by 0.3 percent. However, new car prices fell by 0.3 percent.

So far this year, consumer inflation is rising at an annual rate of 3.6 percent. That compares with an increase of 2.5 percent for all of 2006.