A rise in lodging and housing costs pushed underlying U.S. inflation up at its fastest rate in nine months in May, the government said on Tuesday in a report that could soothe deflation fears.

At the same time, falling energy costs kept overall consumer prices steady. A separate report showed the housing sector still buoyant.

The Consumer Price Index (search), the most widely used gauge of U.S. inflation, was unchanged last month, the Labor Department (search) said. But the so-called core CPI, which strips out volatile food and energy prices, advanced 0.3 percent.

It was the biggest rise in the core index since a matching gain in August last year.

Economists on Wall Street had expected the overall CPI to drop 0.1 percent and the core rate to gain 0.1 percent.

"The concerns about deflation will be softened after this number," said Rick Egelton, deputy chief economist at BMO Financial Group in Toronto.

Separately, the Commerce Department (search) said housing starts rose 6.1 percent to a seasonally adjusted annual rate of 1.732 million units, slightly above analysts' expectations.

Prices for U.S. Treasuries fell slightly and the dollar ticked higher after the data were released.

Core inflation had slowed sharply this year, heightening concerns the economy could tip into deflation, a potentially crippling economic condition in which the overall level of consumer prices drops.

But the latest rise in the core CPI helped pull the 12-month change in the underlying inflation rate up to 1.6 percent, a tick above the 37-year low reached in April.

The department pinned most of May's rise in the core index to a 0.6 percent climb in shelter costs, which include lodging away from home and the cost of housing for homeowners. It was the biggest gain in shelter costs in more than 12 years.

"Eighty percent of that acceleration (in the core CPI) is due to shelter and within shelter half of the overall acceleration was due to lodging away from home, hotels and motels," said Patrick Jackman, an economist with the Bureau of Labor Statistics (search).

Lodging costs rose a steep 4.1 percent, the largest gain on records beginning in December 1997. Lodging costs had fallen sharply earlier this year, a drop many economists attributed to a falloff in tourism ahead of the war in Iraq.

The homeowner's cost of housing, which had been flat in April, rose 0.2 percent.

Energy costs fell 3.1 percent, the second straight monthly drop, as prices boosted by war worries continued to ease. The cost of gasoline plummeted 6.8 percent and fuel oil prices slid 6.3 percent. Natural gas also eased, dropping 1.6 percent.

The report could help allay some worries over deflation.

Officials at the Federal Reserve (search) have said the risk of falling prices is small. Still, they acknowledge deflation, if it set in, could complicate their efforts to spur growth.

Fed Chairman Alan Greenspan (search) has said the potential costs of deflation warranted a "much wider firebreak" when it came to monetary policy than would normally be the case.

The Fed is widely expected to cut interest rates to a level not seen since 1958 at a meeting next week. After a string of 12 rate cuts since early 2001, the benchmark overnight lending rate the Fed controls stands at a 42-year low of 1.25 percent.

"I don't think they're going to be deterred from easing monetary policy on the basis of this information. They'll know it's concentrated in lodging and that's not part of a trend, that's just monthly fluctuations," said Kevin Logan, chief economist at Dresdner Kleinwort Wasserstein in New York.

"They'll still consider that inflation is trending lower and the economy is operating below capacity and inflation is still likely to fall," he said.