Inflation accelerated in January in a worrying sign for the Federal Reserve's campaign to bolster the flagging economy, while a separate report on Wednesday showed more troubling signs for beleaguered housing market.

Annual consumer price inflation increased to an unexpectedly strong 4.3 percent in January from an already elevated rate of 4.1 percent in December, according to the Labor Department.

On a monthly basis, rising food costs helped push consumer prices up for a second straight month in January by 0.4 percent, more than offsetting a moderation in energy price rises.

Excluding volatile food and energy items, growth in core consumer prices accelerated to 2.5 percent from 2.4 percent in December, a level that is likely to make Fed policy-makers uncomfortable.

The bad news on inflation was coupled with more grim news from the housing market, with permits to break ground on new U.S. homes in January decreasing 3 percent to the lowest rate in more than 16 years.

With the housing market's problems now well publicized, financial markets focused on the inflation, which could complicate the Federal Reserve's efforts to shore up the economy through a continuation of aggressive interest rate cuts.

The concern is on the inflation side. We are seeing an elevated trend, especially in the core, said Kevin Flanagan, fixed income strategist for global wealth management at Morgan Stanley in Purchase, New York.

Wall Street opened lower in the wake of the unexpectedly strong consumer prices but the dollar rose. Government bonds, which usually wilt at the prospect of inflation, fell in the wake of the consumer price release.

Economists polled by Reuters had expected a monthly rise of 0.3 percent in consumer prices for an annual inflation rate of 4.2 percent.

The core readings were also above market forecasts of a 0.2 percent increase month-on-month and 2.4 percent year-over-year rise.

In the housing market, permits slipped to a 1.048 million annual rate, the weakest since a 984,000 rate in November 1991. Permits are an indicator of builder confidence in future housing activity.

Starts rose to a 1.012 million annual rate, but it was only a slight rebound from the revised 1.004 million pace in December, which was the lowest pace for starts since May 1991.

In more dour housing news, U.S. mortgage applications plunged last week, and demand hit the lowest level since the start of the year as interest rates surged, an industry group said.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications for the week ended February 15 fell 22.6 percent to 822.8, the lowest level since the week ended January 4.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.09 percent, up 0.37 percentage point from the previous week, the highest since late December.

(Additional reporting by John Parry; Editing by Tom Hals)