Bloomberg NewsWASHINGTON - U.S. consumer prices rose more slowly last month, and the rate of new home construction was the smallest in two and a half years, a combination of tame inflation and cooler economic growth that is likely to give the Federal Reserve room to leave interest rates unchanged next week.

The consumer price index rose 0.2% last month, after a 0.6% June increase, the Labor Department said.

Housing starts unexpectedly fell 3.3%, to an annual rate of 1.512 million units, the third straight decrease and the slowest pace since November 1997, the Commerce Department said.

"The boom in housing looks to be over, and that should signal an easing in growth" in other areas of the economy, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa.

What's more, he said, "Inflation remains well enough under control that the Fed will be under no pressure to do anything" when Fed policymakers meet Tuesday.

Central bankers are expected to do next week what they did in June. At that meeting they held the overnight bank lending rate at a nine-year high of 6.5%, saying the economy was showing tentative signs of slowing and inflation still posed a risk.

The price index's core rate, which excludes food and energy costs, also rose 0.2% last month - the fourth straight month at that pace. The cost of food, housing, and medical care increased, while clothing prices fell. Outside that decline and a drop in the cost of gasoline, prices for other consumer goods generally rose.

Through July, the overall price index rose at a 4% annual rate, compared with a 2.4% increase during the first seven months last year. The core rate increased at a 2.6% annual rate through July, compared with a 1.9% rate of increase in the same period a year earlier.

Energy prices, which account for about a 10th of the index, rose 0.1% last month, compared with a 5.6% surge in June. A decrease in the cost of gasoline was offset by increases for fuel oil, electricity, and natural gas.

The cost of gasoline at the pump was as low as $1.514 a gallon last month, after reaching a record high of $1.711 in the week ended June 19, according to Energy Department statistics. The price fell to $1.489 this week.

In the meantime, last month's decline in new home construction was led by a 2% drop in single-family home starts to the slowest pace since December 1997. Construction of new housing plunged 14.3% in the South, the only region where starts declined.

The report "fits with the idea of a very gradual moderation in home building, which translates into less consumer spending growth on appliances, carpets, drapes, and furniture," said David Orr, chief economist at First Union Corp. in Charlotte.

Wednesday's housing report also showed building permits, a gauge of future construction, fell 2%, to a 1.497 million rate, the lowest since December 1997.

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