U.S. consumer prices rose more than expected in October, chiefly from increases in energy and motor vehicle costs, according to government data on Wednesday that showed the economy may have to confront some inflation threats during its recovery from the worst recession in 70 years.REUTERS/Graphic

WASHINGTON - Construction of new homes in the United States fell sharply last month, showing potential weakness in the economy's recovery, while consumer prices rose slightly more than expected.

The Commerce Department said on Wednesday housing starts dropped 10.6 percent to a seasonally adjusted annual rate of 529,000 units, the lowest level since April and the percentage drop was the biggest since January.

Financial markets had expected starts to rise to 600,000 units. September's housing starts were revised upwards to a 592,000 unit rate from the previously reported 590,000 units.

The trickle-down effect of the housing number is going to be amazing, said Dan Cook, senior market analyst at IG Markets, Chicago. It's likely that more construction crews will get cut after this, and the supplier who supply those crews will be hurt as well. This is not good news at all.

A separate report from the Labor Department showed the Consumer Price Index rose 0.3 percent, a touch above market expectations for a 0.2 percent increase, after rising an unrevised 0.2 percent in September.

U.S. stock index futures turned negative after the data, while U.S. Treasury debt prices extended losses on the higher than expected inflation data. The U.S. dollar rose against the euro, and New York gold futures held gains near record highs.

Groundbreaking for single-family homes fell 6.8 percent last month to an annual rate of 476,000 units, the lowest since May. Starts for the volatile multifamily segment tumbled 34.6 percent to a 53,000 annual pace, extending the previous month's slide.

Compared to October last year, housing starts dropped 30.7 percent. The latest data will be a blow to the housing market, which had shown signs of stabilization after a three-year slump. Residential investment contributed to economic growth in the July-September period for the first time since 2005.

The U.S. economy expanded in the last quarter after four straight quarters of decline. The recovery in the housing market has been led by the popular $8,000 tax credit for first-time buyers, which has since been extended and expanded by the government.

It had been due to expire this month. In October, it was unclear whether the incentive would be extended and this could have contributed to the slide in construction activity last month.

New building permits, which give a sense of future home construction, fell 4 percent to 552,000 units in October. That compared to analysts' forecasts for 580,000 units. Compared to the same period a year-ago, building permits fell 24.3 percent.

The inventory of total houses under construction dropped to a record low 560,000 units last month, the department said, while the total number of permits authorized but not yet started tumbled to an all-time low of 93,900 units.

In the Labor Department report, core prices, which exclude food and energy, rose a more moderate 0.2 percent last month after increasing by the same margin in September.

There's very little cost pass-throughs (in the CPI). Inflation is utterly tame, said Tom Porcelli, senior economist at RBC Capital Markets in New York.

A spike in prices on used cars and trucks and new vehicles accounted for more than 90 percent of the rise in core prices. It was the biggest increase in new vehicle prices since 1981.

(Reporting by Lucia Mutikani and Lisa Lambert; Editing by Neil Stempleman)