By Jason Lange
WASHINGTON (Reuters) - Inflation showed signs of stabilizing in May after a long decline, a potential comfort to Federal Reserve policymakers who want to avoid any chance of a debilitating bout of deflation.
The Labor Department said on Tuesday the consumer price index edged 0.1 percent higher last month after two straight months of declines, while the so-called core index, which excludes food and energy costs, rose 0.2 percent, just above the pace clocked in April.
The core index, which the U.S. central bank monitors closely because it is less volatile and provides a better sense of price trends, was up 1.7 percent in the 12 months through May.
The increase matched the gain in April and suggested that a worrisome downward trend in core inflation, which began a year ago, might be coming to an end as consumer demand strengthens.
That would be a relief to Fed officials who worry that a big drop in inflation could lead to a spiral of falling prices and wages. Removing this risk could make the Fed more comfortable with eventually paring back its bond-buying stimulus.
"Inflation pressures remain very subdued, but downside momentum is fading," said Eric Green, an interest rate strategist at TD Securities in New York.
The central bank began a two-day meeting on Tuesday and is expected to leave a bond-buying stimulus program unchanged.
While May's reading for 12-month core inflation remains below the Fed's 2 percent inflation target, a stabilization could make the Fed more comfortable paring back its economic stimulus programs as soon as this fall.
The overall CPI was up 1.4 percent from a year-ago in May, up three-tenths of a percentage point from the prior month.
"The economy has been performing decently," said Carl Riccadonna, an economist at Deutsche Bank in New York. "I don't think the Fed is concerned" with weak inflation data.
In May, the core price index rose with support from a 0.2 percent increase in clothing prices and a strong 0.3 percent increase in shelter costs.
Yields rose a bit on U.S. government debt and U.S. stock prices were higher at midday.
The Fed is widely seen to be moving closer to cutting back on its extraordinary support for the U.S. economy, which has shown signs of resilience despite tax hikes and government spending cuts this year. It has been buying $85 billion in bonds each month to lower borrowing costs and spur hiring.
A separate report showed U.S. housing starts rose less than expected in May, likely reflecting labor and material constraints. Still, the overall trend remained consistent with a housing market recovery that will help counter the drag on the economy from government austerity.
Housing starts rose 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April's starts were revised up to show a 856,000-unit pace instead of the previously reported 853,000 units.
"What we see is a housing market that will continue to improve this year into 2014," said Gus Faucher, a senior macroeconomist at PNC Financial Services in Pittsburgh.
(Reporting by Jason Lange; Additional reporting by Lucia Mutikani and Paige Gance in Washington and by Karen Brettell and Richard Leong in New York; Editing by Neil Stempleman)