August consumer prices post rare decline

WASHINGTON -- Consumer prices posted a rare decline in August while the battered housing industry saw construction fall to the slowest pace in 12 years.

The new economic reports Wednesday were seen as justification for the Federal Reserve's bolder-than-expected cut in interest rates to try to ward off a recession. Analysts said the waning inflation pressures gave the Fed the room to cut interest rates while the continued severe downturn in housing gave the central bank a reason to move.

The Labor Department reported consumer prices dipped by 0.1 percent in August. It was the first decline since a 0.4 percent drop in October 2006 and reflected a big drop in gasoline and other energy prices.

Meanwhile, the Commerce Department reported construction of new homes fell by 2.6 percent last month to a seasonally adjusted annual rate of 1.331 million units. That was the slowest pace since June 1995 and put construction activity 19.1 percent below the level of a year ago.

The Fed on Tuesday cut its target for the federal funds rate, which governs the rates paid on millions of consumer and business loans, by a half-point to 4.75 percent, double the quarter-point reduction that had been expected.

Analysts predicted housing construction would fall further in coming months, reflecting the recent turmoil in financial markets as investors lost their appetite for securities backed by mortgages because of rising mortgage delinquencies.

"There is a continuing major downslide," said David Seiders, chief economist for the National Association of Home Builders. "We know from our own surveys that August was a really rough month in the mortgage market and the housing market."

Seiders said even with the Fed's cut in interest rates he did not expect to see new home sales stop falling until early next year, with construction starts not stabilizing until the middle of next year.

The problem, he said, was that the rising mortgage foreclosures are dumping more homes on an already glutted market at a time when potential buyers are having difficulty getting mortgages because lenders are tightening standards. Mortgage foreclosures are expected to rise even further as an estimated 2 million adjustable rate mortgages with low teaser rates reset to much higher monthly payments over the next two years.

Yale University economist Robert Shiller testified to the Joint Economic Committee on Wednesday that the current real estate downturn could end up being the most severe since the Great Depression and could drag the country into a recession.

But other analysts said they believed the Fed had acted in time, as long as it cuts rates further in coming months, to avert a full-blown recession.