U.S. consumer prices and housing fan new economic fears

By Glenn Somerville

WASHINGTON (Reuters) - U.S. consumer prices plummeted again at a record pace and groundbreaking on new homes slumped to a new low in November as the recession-hit economy lost momentum, government reports Tuesday showed.

The latest signs of economic distress came hours before Federal Reserve policy-makers slashed the official target for overnight interest rates to a record low zero to 0.25 percent and pledged to use "all available tools" to dispel recession.

Analysts had speculated the Fed might move boldly to ward off rising deflation risks and the U.S. central bank's sweeping action gave stock and bond markets a lift. The Fed also said it will buy more debt issued by government-sponsored mortgage agencies to boost the housing sector.

Earlier it appeared the economy was edging closer to a prolonged period of slumping prices as the economy shrinks.

"I think we're in a deflationary spiral that will probably go on until sometime next year," said Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. in New York. "I think it will probably go on through the majority of 2009."

The Labour Department said its closely watched Consumer Price Index dropped 1.7 percent after falling 1 percent in October -- back-to-back record drops since the department started keeping monthly data in 1947. Core prices, which exclude food and energy items, were flat in November after declining 0.1 percent in October.

On a year-over-year basis, core prices were up 2 percent in November, a level that normally would please U.S. central bank policy-makers, but prices still appear to be headed down.

The Commerce Department said housing starts dropped 18.9 percent to an annual rate of 625,000 units from 771,000 units in October, the lowest since the department started collecting monthly starts data in 1959, and well below the 740,000-unit pace that Wall Street analysts had expected.