updated 3/17/2009 3:23:31 PM ET 2009-03-17T19:23:31

When you've lost almost half your business, even a little hop in activity can look like a huge leap.

Major Market Indices

The Commerce Department said Tuesday that construction of new homes and apartments jumped 22.2 percent in February compared with January, pushing total activity to a seasonally adjusted annual rate of 583,000 units.

The larger-than-expected jump in housing starts was a rare bit of good news for the battered housing industry, but it comes as construction activity remains 47.3 percent below where it was a year ago.

The question is: Will the increase be the start of a real estate rebound? The housing market still faces a slew of hurdles, including rising joblessness, increasing foreclosures, huge inventories of empty houses and persistently tight credit.

Those problems are likely to be some of the main talking points at the Federal Reserve's two-day meeting, which began Tuesday, where the central bank's rate-setting committee they will take fresh stock of financial and economic conditions. They are all but certain to leave a key bank lending rate at a record low to try to brace the economy, which has been stuck in a recession since December 2007.

All areas of the country reported an increase in housing starts in February, except the West, which has been hardest hit by the current housing slump. Applications for building permits rose, also, gaining 3 percent with permits for single-family homes up 11 percent.

Meanwhile, the Labor Department reported that wholesale prices edged up a slight 0.1 percent in February as a big drop in food costs offset a second monthly increase in energy prices.

The 0.1 percent increase in wholesale inflation was much lower than the 0.8 percent surge in January and smaller than the 0.4 percent increase economists had expected. Compared with a year ago, wholesale prices are actually down 1.3 percent.

Core inflation, which excludes energy and food, edged up 0.2 percent in February, only slightly higher than the 0.1 percent gain economists had expected. Core prices had risen 0.4 percent in January.

Only last summer, Fed officials had started to worry that a surge in energy costs could spread to other areas of the economy and boost inflation to unacceptable levels. But after the financial crisis struck in the fall, the Fed switched signals and is now aggressively fighting a deepening recession with no real threat of inflation.

On Wednesday, Fed officials are expected to signal that they will continue to keep a key interest rate at a record low near zero percent for as long as necessary and use other unorthodox means to jump-start the economy.

The Fed has the leeway to focus on the weak economy because inflation pressures are expected to remain law in the face of widespread layoffs that are depressing wage demands. The nation's unemployment rate is now at quarter-century peak of 8.1 percent. Some economists think it will hit 10 percent by the end of this year.

The hope is that rock-bottom borrowing costs will spur consumers and businesses to step up spending, which would aid the economy. So far, however, still-tight credit, rising unemployment and other negative forces have forced Americans to retrench.

It's less clear whether the Fed will unveil new actions to battle the worst financial crisis since the 1930s.

One option advanced at its last meeting in January is buying long-term Treasury securities. Doing so would help further drive down mortgage rates and help the crippled housing market, economists said.

Another option put forward in January is expanding a Fed program aimed at bolstering the mortgage market. The Fed could boost its purchases of debt issued or guaranteed by mortgage giants Fannie Mae and Freddie Mac. Since that program was announced late last year, mortgage rates have fallen.

The 0.1 percent rise in wholesale inflation in February reflected a 1.3 percent increase in energy prices, which have been rising for two months after having retreated for five straight months.

Gasoline prices jumped 8.7 percent in February after a 15 percent surge in January.

Food costs fell for a third straight month, dropping 1.6 percent in February, the biggest one-month decline in three years. The costs of eggs, fruits, vegetables and dairy products were all down.

Outside of food and energy, prices for cigarettes rose 2.7 percent, the biggest increase in two years, while the price of light trucks rose 1.3 percent, a gain that is not expected to last given the weakness in auto sales.

Prices for computers dropped 4.5 percent, the biggest one-month fall since January 2005.

Inflation is not expected be a problem for some time to come given the prolonged recession, which is already the longest downturn in a quarter-century. Overall economic growth fell at an annual rate of 6.2 percent in the October-December quarter and many economists expect the drop in the gross domestic product for the current quarter will be a similarly steep decline.

Many economists say the Fed will not even contemplate interest rate increases until the unemployment rate, which soared to a 25-year high of 8.1 percent in February, declines.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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