Consumer prices fell in March for the first time in four months while factory output slipped, strengthening the argument for the Federal Reserve to maintain its monetary stimulus to speed up economic growth.
Other data on Tuesday suggested the housing market recovery was losing momentum, even though housing starts jumped in March to their highest level since 2008.
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"For the Fed, it's business as usual and there is not likely to be an acceleration in growth momentum that would cause them to shift their policy stance anytime soon," said Millan Mulraine, senior economist at TD Securities in New York.
The Labor Department said its Consumer Price Index slipped 0.2 percent as gasoline prices tumbled, unwinding some of the 0.7 percent increase in February. Economists had expected a flat reading last month.
In the 12-months through March, consumer prices rose 1.5 percent, the smallest increase since July. Prices had increased 2.0 percent in February.
Stripping out volatile energy and food, consumer prices rose only 0.1 percent after advancing 0.2 percent in February. That took the increase over the 12 months to March to 1.9 percent. The so-called core CPI had increased 2.0 percent in February.
A separate report from the Fed showed output at the nation's factories slipped 0.1 percent after advancing 0.9 percent in February. The decline was nearly broad based, with output dropping for primary metals and electronics.
Automobile assembly, however, increased. A jump in utilities because of unusually cold weather helped to lift industrial production 0.4 percent last month, adding to February's 1.1 percent increase.
Stocks on Wall Street were trading higher after falling sharply on Monday. U.S. Treasury debt prices fell, while the dollar fell broadly.
Data have suggested economic growth accelerated in the first quarter after a near stall in the final three months of 2012.
But in a replay of the prior two years, the economy appears to have hit a speed bump at the end of the January-March quarter, with data ranging from employment to retail sales and manufacturing weakening significantly in March.
Much of the weakness is blamed on tighter fiscal policy in the form of smaller paychecks and deep government spending cuts.
The signs of muted inflation pressures and slowing economic growth could bolster the case for the Fed to remain on its very easy monetary policy path, despite divisions among policymakers over continued asset purchases.
Minutes of the Fed's March 19-20 meeting published last week showed the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds meant to keep rates low and spur faster job growth.
A third report from the Commerce Department showed housing starts rose 7.0 percent last month to a 1.04 million-unit annual rate, the highest since 2008.
However, the rise in starts was driven by the volatile multi-family sector, while groundbreaking for single-family units fell. In addition, overall permits for future construction tumbled 3.9 percent -- reversing February's gain.
That suggested a slowdown in housing activity, coming on the heels of a report on Monday that showed a third straight month of decline in homebuilders' confidence in April.
"The decline in single starts and permits is consistent with recent hints the housing recovery has lost some momentum," said David Sloan, senior economist at 4Cast Ltd in New York.
Home construction is being fueled largely by a demand for rental apartments. Homebuilding added to gross domestic product last year for the first time since 2005, and the trend is expected to continue this year.
Inflation was held down last month by a 4.4 percent drop in gasoline prices after they spiked 9.1 percent the prior month. Food prices were flat after edging up 0.1 percent. There is still no sign of a pass-through from last summer's drought.
There was little inflation on the housing front, with owners' equivalent rent -- which accounts for about a third of the core CPI -- rising only 0.1 percent after gaining 0.2 percent in February.
Apparel prices recorded their largest drop since April 2001, while the cost of new motor vehicles rose 0.1 percent after falling 0.3 percent the prior month. Prices for used cars and trucks rose 1.2 percent, the largest increase since April.
(Additional reporting Jason Lange in Washington and Richard Leong in New York; Editing by Andrea Ricci)