A sharp drop in clothing prices and soft gains in housing and medical costs kept underlying inflation in check last month, a U.S. government report showed.

Meanwhile, U.S. home construction unexpectedly climbed in March and permits for future building posted the first increase in three months, a sign of hope for the struggling housing sector.

The consumer price index rose 0.6% in March, the U.S. Labor Department said today, up from February’s 0.4% rise. But the core CPI, which excludes volatile food and energy prices, advanced just 0.1%, half the previous month’s increase. Unrounded, the CPI rose 0.608% last month. The core CPI advanced 0.061% unrounded.

The core inflation data were better than Wall Street forecasts. Economists had called for a 0.6% CPI increase and 0.2% core rise.

Consumer prices were 2.8% higher than a year earlier, according to today’s report, while core prices advanced 2.5% from a year ago, down from last year’s peak of 2.9%. Over the last three months, the core CPI has risen at a 2.3% annualized rate.


Meanwhile, U.S. housing starts increased 0.8% to a seasonally adjusted 1.518 million annual rate, after rising by 7.6% in February, the U.S. Commerce Department said today. Originally, February starts were seen increasing by 9% to 1.525 million.

The 0.8% increase in March construction surprised analysts. The median estimate of 24 economists surveyed by Dow Jones Newswires was a 1.6% drop to a 1.500 million annual rate. Year-to-year, housing starts were 23% lower than the level in March 2006.

Building permits last month rose by 0.8% to a 1.544 million annual rate. Economists expected a 1.4% decline to 1.510 million. Permits fell an unrevised 2.5% in February to 1.532 million, decreased 2.6% in January and rose 6.6% during December.

In a separate report, U.S. industrial production fell more than expected during March as utilities output plunged on unseasonably warm weather, while durable goods manufacturing picked up during the month.

Industrial production fell 0.2%, the Federal Reserve said Tuesday. Output increased 0.8% in February, revised down from a previously estimated 1.0% increase. Capacity utilization fell to 81.4%. February capacity use was 81.6%, revised down from 82.0%. The 1972-2005 average remained 81.0%.

Economists expected industrial production to rise 0.1% in March, with a capacity utilization rate of 81.9% for the month. Over the 12 months ending in March, industrial production advanced 2.3%, while capacity use was also up 2.3% from a year earlier.

Manufacturing production increased 0.7% in March, after rising 0.1% in February and falling 0.6% in January. Manufacturing capacity utilization rose to 80.1% from 79.7%.