US housing starts unexpectedly fell in January likely as bad weather disrupted building activity in some parts of the country, in what could be a temporary setback for the housing market recovery.

Other data on Wednesday showed producer prices rose last month and there were signs of an uptick in underlying producer inflation. Inflation is being watched closely for signs of whether the Federal Reserve will raise interest rates this year.

A shaky economic outlook and a sharp stock market sell-off have reduced the chances of the US central bank tightening monetary policy further after it hiked its key overnight interest rate in December for the first time in nearly a decade.

Groundbreaking fell 3.8 per cent to a seasonally adjusted annual pace of 1.099 million units, the Commerce Department said. Starts dropped in the Northeast, which was blanketed by snowstorms last month, and also tumbled in the Midwest.

Economists polled by Reuters had forecast housing starts rising to a 1.17 million-unit pace last month.

The dollar rose against the euro after the data, while prices for US Treasury debt extended losses.

The housing starts data came on the heels of a survey on Tuesday showing confidence among homebuilders fell in February amid concerns over “the high cost and lack of availability of lots and labour.” Builders were also less optimistic about current sales.

Still, the housing market fundamentals remain strong, with a tightening labour market starting to push up wage growth.

Though residential construction accounts for a small fraction of gross domestic product, the decline in starts at the beginning of the year suggests that an anticipated rebound in economic growth will be modest.

The economy grew at a 0.7 percent annual pace in the fourth quarter after consumer spending moderated and the robust dollar hurt exports. GDP growth was also restrained by efforts by businesses to sell inventory and cuts in capital goods spending by energy firms.

Economic growth estimates for the first quarter are currently around a 2 percent rate.

In January, single-family housing starts, the largest segment of the market, fell 3.9 per cent to a 731,000-unit pace. Single-family starts tumbled 14.1 per cent in the Northeast and fell 3.8 per cent in the Midwest. Overall starts in the Midwest plummeted 12.8 per cent last month to their lowest level in nearly a year.

Groundbreaking on single-family projects was unchanged in the South, where most home building takes place. Single-family starts in the West dropped 10 per cent.

Housing starts for the volatile multi-family segment dropped 3.7 per cent to a 368,000-unit pace.

Building permits dipped 0.2 per cent to a 1.202 million-unit rate last month. Permits for the construction of single-family homes fell 1.6 per cent last month. Multi-family building permits increased 2.1 per cent.

In a second report, the Labor Department said its producer price index edged up 0.1 per cent in January after slipping 0.2 per cent in December. In the 12 months through January, the PPI decreased 0.2 per cent after declining 1.0 per cent in December.

The index for final demand services increased 0.5 per cent in January, increasing for a third straight month. A 4.0 per cent jump in margins for machinery and equipment accounted for nearly half of the increase in prices for services last month.

There were also increases in prices related to securities brokerage and dealing, loan services, apparel, footwear and accessories retailing, as well as fuels and lubricants retailing.

But energy prices fell 5.0 per cent after sliding 3.5 per cent in December. Wholesale food prices rose 1.0 per cent after declining 1.4 per cent in December.

Goods prices fell 0.7 percent after a similar drop in December. A key measure of underlying producer price pressures that excludes food, energy and trade services rose 0.2 per cent last month after advancing by the same margin in December.

The so-called core PPI was up 0.8 per cent in the 12 months through January.

Reuters