Sept. 19 (Bloomberg) -- Consumer prices in the U.S. unexpectedly fell in August for the first time this year, as Americans paid less for gasoline and housing costs were unchanged.

The 0.1 percent decrease followed a 0.1 percent advance in July, the Labor Department said today in Washington. Core prices, which exclude food and energy, climbed 0.2 percent as forecast and were up 2.1 percent from a year earlier.

Slowing growth and weaker consumer spending, driven by the deepest housing recession in 16 years, are keeping companies from increasing prices. Today's figures may ease concern at the Federal Reserve, which yesterday cut its key rate for the first time in four years, that inflation remains a risk to the economy.

``Core inflation has now been falling for nearly a year,'' said Ian Shepherdson, chief economist at High Frequency Economics in Valhalla, New York, who correctly forecast the core number. ``The Fed's ease yesterday was not a gamble.''

A separate government report showed builders in the U.S. began work on the fewest homes in 12 years in August, raising the risk the real-estate recession will spread to other parts of the economy.

Housing Starts Fall

The 2.6 percent decrease in housing starts to a lower-than- forecast annual rate of 1.331 million followed July's 1.367 million pace, the Commerce Department said. Building permits dropped 5.9 percent to a 1.307 million pace, also the lowest since 1995.

Yields on two-year notes, which slid yesterday after the Fed lowered its benchmark by half a point to 4.75 percent, were little changed after the reports. Notes due in 2009 yielded 3.98 percent as of 10:36 a.m. in New York. The benchmark 10-year U.S. Treasury note yielded 4.54 percent, up 7 basis points from yesterday.

Economists had forecast no change in consumer prices, according to the median of 79 projections in a Bloomberg News survey. Estimates ranged from a decline of 0.3 percent to a 0.3 percent gain. The median estimate for core inflation was for a 0.2 percent increase.

Consumers paid 2 percent more for goods and services in August compared with the same time last year, less than the 12- month increase of 2.4 percent reported in July. The 12-month increase in the core rate was the smallest since March 2006.

Today's report showed energy prices fell 3.2 percent, the biggest decline since October, after dropping 1 percent in July. Gasoline prices fell 4.9 percent.

Food Prices Rise

Food prices, which account for about a fifth of the CPI, rose 0.4 percent after a 0.3 percent increase in July.

Housing costs, which include some energy costs and account for two-fifths of the total consumer price index, were unchanged after rising 0.2 percent. Owner's equivalent rent, which makes up 30 percent of the core CPI, increased 0.2 percent for a third straight month.

Medical-care costs rose 0.5 percent after increasing 0.6 percent. Clothing prices fell 0.5 percent following a 0.4 percent gain. Auto prices rose 0.1 percent.

The housing slump and higher gasoline prices since the start of the year have slowed consumer spending, which accounts for more than 70 percent of the economy.

Almost 60 percent of the CPI covers prices that consumers pay for services ranging from airline fares to movie tickets and laundry charges.

The Fed's preferred inflation gauge, a core measure tied to consumer spending compiled by the Commerce Department, was up 1.9 percent in July from a year earlier.

Some Fed policy makers, including Ben S. Bernanke before he became chairman, have said they would prefer that rate to be in a 1 percent to 2 percent range.

Fed Cuts Rates

The Fed yesterday, in announcing it was cutting its target interest rate, said the move was ``intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets.''

The Fed said ``readings on core inflation have improved modestly this year,'' though ``some inflation risks remain.''

Some auto and electronics-makers have been cutting prices or boosting incentives to retain or expand market share.

Carmaker Chrysler LLC will offer six-year, no-interest loans and cash rebates on some of its 2007 models through Oct. 1 to boost U.S. sales of its cars and trucks, spokeswoman Lori Pinter said Sept. 5. The new incentives are in addition to five- year, no-interest loans Auburn Hills, Michigan-based Chrysler now offers on some vehicles.

Ford Motor Co. began offering rebates of as much as $1,000 in addition to existing incentives on most 2007 and 2008 models Sept. 4. Ford's offer also runs through Oct. 1.

Computer maker Apple Inc. on Sept. 5 cut the price of its iPhone by $200 to $399, saying it wanted to make the product available to more households. A day later, Chief Executive Officer Steve Jobs offered a $100 rebate to those who paid full price and apologized to customers.

``We want to make it affordable for even more customers as we enter this holiday season,'' said Jobs.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: September 19, 2007 10:45 EDT