By Lucia Mutikani
WASHINGTON (Reuters) - Consumer prices fell in March for the first time in four months as the cost of gasoline tumbled, providing scope for the Federal Reserve to maintain its monetary stimulus to speed up economic growth.
Other data on Tuesday suggested the housing market recovery was losing momentum, even though housing starts jumped in March to their highest level since 2008.
The Labor Department said its Consumer Price Index slipped 0.2 percent, unwinding some of the 0.7 percent increase in February. Economists had expected a flat reading last month.
In the 12-months through March, consumer prices rose 1.5 percent, the smallest increase since July. Prices had increased 2.0 percent in February.
"On balance, this reflects the soft demand environment out there. There is not a lot of price pressure. That's good for the Fed to maintain its accommodative policy," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.
Stripping out volatile energy and food, consumer prices rose only 0.1 percent after advancing 0.2 percent in February. That took the increase over the 12 months to March to 1.9 percent. The so-called core CPI had increased 2.0 percent in February.
The signs of muted inflation pressures could bolster the case for the Fed to remain on its very easy monetary policy path, despite divisions among policymakers over continued asset purchases.
Minutes of the Fed's March 19-20 meeting published last week showed the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and spur faster job growth.
Data have suggested economic growth accelerated in the first quarter after a near stall in the final three months of 2012.
But in a replay of the prior two years, the economy appears to have hit a speed bump at the end of January-March quarter, with data ranging from employment to retail sales and manufacturing weakening significantly in March.
Much of the weakness is blamed on tighter fiscal policy in the form of smaller paychecks and deep government spending cuts.
A second report from the Commerce Department showed housing starts rose 7.0 percent last month to a 1.04 million-unit annual rate, the highest since 2008. However, the rise in starts was driven by the volatile multi-family sector and permits for future construction fell 3.9 percent.
That suggested a slowdown in activity, coming on the heels of a report on Monday that showed a third straight month of decline in homebuilders' confidence in April.
"The decline in single starts and permits is consistent with recent hint the housing recovery has lost some momentum," said David Sloan, senior economist at 4Cast Ltd in New York
Home construction is being fueled largely by a demand for rental apartments.
Homebuilding added to gross domestic product last year for the first time since 2005, and the trend is expected to continue this year.
In March, gasoline prices dropped 4.4 percent after spiking 9.1 percent the prior month. Food prices were flat after edging up 0.1 percent. There is still no sign of a pass-through from last summer's drought.
Though overall housing costs maintained their steady rise, owners' equivalent rent -- which accounts for about a third of the core CPI -- rose only 0.1 percent after rising 0.2 percent in February.
Apparel prices dropped 1.0 percent, the largest decline since April 2001, after falling 0.1 percent in February. New motor vehicle prices edged up 0.1 percent after falling 0.3 percent the prior month. Prices for used cars and trucks rose 1.2 percent, the largest increase since April.
(Reporting by Lucia Mutikani, additional reporting by Richard Leong in New York; Editing by Andrea Ricci)