Oct. 17 (Bloomberg) -- Prices paid by U.S. consumers rose more than forecast in September as food and energy costs climbed, while the core measure that excludes those items showed inflation remains contained.

The 0.3 percent increase followed a 0.1 percent decline in August prompted by falling oil prices, the Labor Department said today in Washington. So-called core prices rose 0.2 percent for a second month in line with forecasts.

With inflation under control, Federal Reserve policy makers have leeway to consider cutting their benchmark rate again later this month to keep the economy growing in the face of a deepening housing recession. Fed Chairman Ben S. Bernanke this week reiterated the central bank would ``act as needed'' to foster sustainable growth along with price stability.

The report ``should further ease inflation concerns and allow the Fed to focus on risks to growth,'' said Zach Pandl, an economist at Lehman Brothers Holdings Inc in New York, which correctly forecast the rise in the core rate. ``To the Fed, the current level of core CPI inflation is only moderately high, and it will not significantly constrain their policy options.''

Another government report showed housing starts in the U.S. plunged more than forecast to a 14-year low in September, keeping the real-estate market the Fed's top concern. The 10.2 percent decrease to an annual rate of 1.191 million followed a 1.327 million rate the prior month, the Commerce Department said today in Washington. Building permits fell 7.3 percent to a 1.226 million pace.

Economists had forecast consumer prices would rise 0.2 percent, according to the median of 82 projections in a Bloomberg News survey. Estimates of the increase ranged from no change to a 0.5 percent gain.

Core prices were forecast to rise 0.2 percent.

12-Month Increase

Over the past 12 months, consumer prices rose 2.8 percent, compared with a 2.0 percent rise in the 12 months through August, the lowest since October 2006. Consumer prices excluding food and energy rose 2.1 percent in the year through September, the same as in the 12 months ended in August.

Today's report showed energy prices rose 0.3 percent, the first increase since May, after declining 3.2 percent in August. Gasoline prices rose 0.4 percent.

Food prices, which account for about a fifth of the CPI, rose 0.5 percent after a 0.4 percent increase in August.

Housing costs, which include some energy costs and account for two-fifths of the total consumer price index, rose 0.3 percent after no change. Owner's equivalent rent, which makes up 30 percent of the core CPI, increased 0.3 percent after rising 0.2 percent.

Rent Increases

Rent increases have been slowing as the housing market is bogged down in its worst recession in 16 years. Declining home construction has detracted from growth for a year and a half and is weakening the consumer spending that makes up 70 percent of the economy.

Medical-care costs rose 0.3 percent after increasing 0.5 percent. Clothing prices climbed 0.3 percent following a 0.5 percent decline. Auto prices dropped 0.3 percent.

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

The growth outlook for the rest of 2007 has deteriorated since mid-August, when concern over defaults on subprime mortgages squeezed access to credit, prompting further declines in home sales and construction.

The economy will grow 2 percent this year, the least since 2002, according to a Bloomberg survey of economists taken the first week of October. Economists had projected a 2.5 percent rate of expansion at the start of the year.

Fed's Action

Reacting to the credit turmoil, the Fed on Sept. 18 lowered its benchmark rate by half a percentage point, the first cut in four years. Trading in Fed funds futures suggests investors are betting on a possible quarter-point rate cut in the benchmark rate at the December Fed meeting, with odds narrowing in recent days for a cut in October.

Bernanke said Oct. 15 the housing industry's contraction will be a ``significant drag'' on U.S. growth into next year, though evidence of a broader impact on spending is limited. He said policy makers will ``act as needed'' to secure growth and contain prices.

``On the inflation side, prices of crude oil and other commodities have increased somewhat in recent weeks,'' Bernanke said in a speech in New York. However, he said, recent data ``are consistent with continued moderate increases in consumer prices.''

The Fed's preferred price gauge, which excludes food and energy costs, rose 1.8 percent in August from a year earlier, the third straight month, within the 1 percent to 2 percent comfort range stated by Bernanke and several other Fed officials.

Faced with rising energy and other commodity costs, some companies are raising prices to maintain their profit margins.

AMR Corp.'s American Airlines increased the majority of its U.S. fares by $10 round-trip, a JPMorgan Chase & Co. analyst said Oct. 12. The increase comes as jet-fuel prices climb, Jamie Baker said in a report to investors.

Procter & Gamble Co., the largest U.S. consumer-products company, is increasing U.S. prices of fabric softeners by 9 percent to counter rising costs for energy and raw materials. P&G, the maker of Downy fabric softener, will also charge more for soap and body washes beginning in January, Chief Financial Officer Clayton Daley said last month.

``We are committed when necessary to raising prices to recover higher energy and commodity costs,'' Daley told analysts at a Bank of America Corp. conference in San Francisco Sept. 18.

Still, some retailers are slashing prices to boost sales as consumer spending slows.

Wal-Mart Stores Inc., the world's largest retailer, is lowering prices on certain popular toys more than two weeks earlier than last year to win back holiday shoppers hit by higher fuel, housing and food costs, the company said Oct. 1. Bentonville, Arkansas-based Wal-Mart is marking down some items by as much as 50 percent.

``This is the time of year when our customers are really scouting for the best toys,'' Laura Phillips, Wal-Mart's chief toy officer, said in a Sept. 28 interview.

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

Last Updated: October 17, 2007 09:24 EDT