WASHINGTON DC, United States – CONSTRUCTION of homes surged in April to the highest level in 18 months, fuelled by buyers capitalising on an expiring tax credit. Permits for new construction sank, signalling the rebound could fade.

Low mortgage rates and two tax credits — up to US$8,000 for new buyers and US$6,500 for current owners who buy and move into another home — have boosted home sales this year. To receive a tax credit, borrowers had to have a signed offer by April 30 and must close the deal by the end of June.

The rate of home building has now risen more than 40 per cent from the bottom in April 2009, though it’s still down 70 per cent from the decade’s peak in January 2006.

Without the tax credit, analysts say home sales will slow in the second half of this year. High unemployment and tight lending standards will likely help keep many buyers away.

The report yesterday from the Commerce Department said the rate of construction of single-family homes and apartment buildings rose 5.8 per cent last month to a seasonally adjusted annual rate of 672,000. That was up from an upwardly revised March level of 635,000. The rate, the highest since October 2008, was driven by a 10 per cent increase in single-family home building.

A separate report yesterday showed wholesale inflation remains tame. Prices fell 0.1 per cent in April, the second drop in three months. Core inflation, which excludes volatile energy and food prices, rose 0.2 per cent, the Labour Department said. But over the past year, core prices are up just one per cent.

The absence of inflation pressures means the Federal Reserve can keep interest rates at record lows to bolster the economic recovery.

Encouraging signals on the economy had minimal impact on the stock market. The Dow Jones industrial average rose about 16 points in midday trading. Analysts say investors are balancing signs of a strengthening US recovery with concerns that the European debt crisis will spread and undermine the global economic rebound.

In the Commerce report, the government said building permits, a gauge of future activity, sank 11.5 per cent to an annual rate of 606,000. That’s the lowest point since October 2009.

Still, a survey Monday showed homebuilders are feeling more optimistic. The National Association of Home Builders said its housing market index, which tracks industry confidence, rose three points this month to 22, the highest reading since August 2007. Readings below 50 indicate negative sentiment.

In March, sales of new homes rose 27 per cent in March. That was the biggest monthly increase in 47 years.

A four-decade low stockpile of new single-family homes, combined with low interest rates and prices, has made home buying affordable, said Sal Guatieri, an economist with BMO Capital Markets. That means that even without the tax credits, housing starts should rise modestly.

“Until the foreclosure wave ebbs and the overhang of unsold existing homes abates, the recovery in homebuilding will be subdued,” Guatieri said.

For April, food costs dipped by 0.2 percent. It was the first decline in nine months. And it came after a 2.4 per cent surge during the previous month — the largest gain in 26 years. The March increase reflected the impact of a winter freeze in Florida that damaged citrus and vegetable crops.

Energy prices fell 0.8 per cent in April with gasoline prices down 2.7 per cent.

The rise in core inflation followed two straight months of 0.1 per cent gains. Household appliances posted a 1.9 per cent jump, the largest since October 1974. Passenger car prices rose 0.6 per cent. It was the biggest such increase since June.

Economists predict a report on consumer prices on Wednesday will also show slight price pressures. They are predicting overall prices and core inflation will both post 0.1 per cent gains.

The recession has banished inflation for now. The more than eight million jobs lost over the past two years has left workers without the bargaining power to boost wages.

In addition, companies, facing slack demand and idle plant capacity, have lacked the ability to raise prices.

The absence of inflation has allowed the Fed to keep its benchmark federal funds rate at a record low of zero to 0.25 per cent since December 2008. The Fed has sought to invigorate economic growth.

Some Fed officials have argued that the greater threat now is the risk of deflation, or a debilitating drop in prices. That is something the United States has not suffered since the Great Depression.