Economy still sluggish, but reports show modest improvement

— -- Inflation slowed from its summertime blip in September, housing starts rebounded, and the Federal Reserve reported signs of modest economic growth, suggesting that fears of a double-dip U.S. recession may have been overblown.

Consumer prices rose 0.3%, driven by cost increases for food and energy, while builders broke ground on new homes at an annual pace of 658,000 houses and apartments, the U.S. government said in two separate reports. Each was better than economists' forecasts. The Fed's "beige book" survey of business conditions said companies reported tourism and auto sales are leading growth in much of the nation.

The news shows inflation is well under control and growth is still weak, said Diane Swonk, chief economist at Mesirow Financial in Chicago.

The pockets of inflation in food and energy should slow as consumers balk and growth slows in developing nations that have pushed commodities prices higher, Swonk said.

"The essential story is that a very sluggish economy is keeping inflation in check," said Ken Goldstein, chief economist at the Conference Board in New York. "In August, we wondered if the economy was about to go off a cliff. Now, it looks like August was just a bad month."

The consensus before the report was that the consumer price index would rise 0.3%, and that the core inflation rate, excluding more volatile energy and food costs, would be 0.2%. Instead, the core rate was 0.1%, for a 12-month gain of 2.0%. The two reports follow a better-than-expected 1.1% retail sales gain in September, said Randell Moore, editor of the Blue Chip Economic Indicators newsletter . That makes a recession less likely, although falling savings rates and the looming expiration of last year's payroll tax cut mean consumers might not have the cash to keep spending, he said.

The biggest inflation flare-ups continue to be in food eaten at home and in energy, especially gasoline prices.

Groceries rose 0.6% in September and 6.3% for the last year, while energy jumped 2% last month, bringing its 12-month surge to 19.3%.

Food inflation will likely slow soon, Swonk said. Last week's retail sales report said grocery store sales fell 0.3% in September as overall sales rose. Combined with falling after-inflation incomes since June, grocery-store data suggest consumers are switching to cheaper products, Swonk said.