updated 10/17/2007 9:11:45 AM ET 2007-10-17T13:11:45

Consumer inflation rose at the fastest pace in four months in September, reflecting higher energy and food costs.

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The Labor Department reported Wednesday that its closely watched Consumer Price Index increased by 0.3 percent last month as energy costs, which had been falling for three months, posted an increase and food prices jumped by the largest amount since June.

The 0.3 percent CPI increase was slightly above the 0.2 percent advance that economists had been expecting. Core inflation, which excludes energy and food, was up a more moderate 0.2 percent, in line with expectations.

In a second report, the Commerce Department said that construction of new homes plunged by 10.2 percent in September, reflecting the deepening troubles in housing.

The bigger-than-expected decline pushed construction down to a seasonally adjusted annual rate of 1.191 million units.

Applications for building permits, considered a good sign for future activity, also fell sharply in September, dropping by 7.3 percent to 1.226 million units.

Housing sales, which had set records for five straight years, have been slumping since 2006, a downturn that has intensified in recent months as mortgage lenders have tightened standards for giving loans in response to soaring defaults.

Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson warned this week that the housing downturn was likely to persist longer than had been expected.

The National Association of Homebuilders reported Tuesday that its index of builder confidence fell for the eighth consecutive month in October, pushing the index to a record-low of 18 from a reading of 20 in September.

Many economists believe that housing will trim economic growth by more than a percentage point in the current quarter. However, they also think the country will avoid a recession because they believe the Federal Reserve will cut interest rates further should there be more signs that the housing downturn is effecting the overall economy

The 0.3 percent increase in consumer prices in September was the largest rise since a .07 percent surge last May, when energy prices were soaring.

Energy costs were up 0.3 percent in September following three straight monthly declines. Gasoline costs rose 0.4 percent, the biggest increase since May, while heating oil costs were up 0.9 percent.

Food cost jumped by 0.5 percent last month, the largest increase since a similar rise in June. The higher prices were led by a 13.1 percent surge in the cost of dairy products and a 7.2 percent increase in poultry prices. The cost of fresh fruits, beef and pork were also up. Vegetable prices, however, fell by 4 percent in September.

The 0.2 percent increase in core inflation, which excludes energy and food, matched the gains of the past three months.

Airline ticket prices rose 1.1 percent in August, while clothing costs were up by 0.3 percent. However, new car prices fell by 0.3 percent.

So far this year, consumer inflation is rising at an annual rate of 3.6 percent. That compares with an increase of 2.5 percent for all of 2006.

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