WASHINGTON — The retreating economy chased U.S. consumer prices down by the most in 61 years during October, sending home construction to an all-time low.

The consumer price index dropped 1.0% on a seasonally-adjusted basis compared to the previous month, the Labor Department said Wednesday. The core CPI, which excludes food and energy costs, fell 0.1%.

A separate Commerce Department report showed housing starts fell a fourth straight time, down 4.5% to a seasonally-adjusted 791,000 annual rate, a record low.

“It’s consistent with sharper deterioration in economic activity,” said Scott Brown, chief economist at Raymond James.

The 1.0% drop in consumer prices was the largest since February, 1947. Energy prices plunged 8.6% — a drop much greater than the 1.9% fall in September, when hurricanes in the Gulf of Mexico interfered with energy production and slowed the decline in energy prices. Gasoline prices in October plummeted 14.2%.

Food prices climbed 0.3% last month. Transportation prices decreased 5.4% on the month as airline fares dropped 4.8% and new vehicle prices fell by 0.5%. Housing, which accounts for 40% of the CPI index, was unchanged.

Medical care prices increased 0.2%, while clothing prices fell 1.0% compared to September.

“This report clearly reflects the crunch in discretionary consumers” spending, which is likely to persist for the foreseeable future,” said Ian Shepherdson, an analyst at High Frequency Economics.

Consumer spending, once a big engine for the economy, started a dive last summer. The economy in the third quarter declined, falling 0.3%, and the experts contend it has kept shrinking during the current, fourth quarter, which started Oct. 1. The first reading on gross domestic product, the government’s broad measure of the economy, won’t be available until late January.

The declining inflation numbers give the Federal Reserve room to chop interest rates again and give the economy another kick. Late last month, the Fed slashed the fed funds rate by another 0.50 percentage point to 1%.

The housing slump has gotten some blame for the economy’s downturn. Commerce data show that, year over year, housing starts last month were 38.0% below the level of construction in October, 2007.

It appears that the slide in construction will continue.

Building permits, a sign of future construction, declined 12.0% in October to a 708,000 annual rate in October, the Commerce Department data on starts showed.

“This report is a shocker,” IHS Global Insight economist Patrick Newport said.

Builders have been cutting back because sales and prices of new homes keep falling. The latest government report on new-home sales in the U.S. showed demand in September was 33.1% below the year-earlier level. The median price was down 9% over those 12 months. Inventories of unsold homes are high. The economy’s slump is sending the unemployment rate higher. Meek consumers awash in debt don’t want too spend, and on top of all that, securing financing is harder these days.

Starts of single-family homes decreased by 3.3% in October to 531,000. Construction of housing with two or more units fell 6.8% to 260,000.

“With sales very slow, and with the recent credit market dislocations and tighter lending standards, single-family housing starts will probably drop somewhat further,” Insight Economics analyst Steven Wood said. “Housing’s contribution to economic growth will be significantly negative again in (the fourth quarter). The silver lining is that with housing starts now off more than 65% from their peak, housing construction should be pretty close to a bottom.”

By Jeff Bater
Of DOW JONES NEWSWIRES