WASHINGTON, Nov 19, 2008 (AFP) - US economic gloom worsened Wednesday as data showed a record low in housing starts as well as a record plunge in consumer prices that pointed to deflation risks, analysts said.

The Labor Department reported US consumer prices fell 1.0 percent in October, the steepest decline since the department began publishing the consumer price index (CPI) data in February 1947.

Together, the reports point to an even weaker-than-expected economic picture that could take a hefty bite out of US economic activity in the fourth quarter and beyond.

"With economic growth and inflation pedaling backwards, deflation talk is deafening," said Jennifer Lee at BMO Capital Markets. "Tighten your seatbelts as fourth-quarter growth is going to be ugly."

The CPI report was dragged down by a massive 14 percent drop in gasoline prices and declines in other energy costs, but prices fell in almost every other category, including apparel and lodging, with only food prices still rising.

Analysts said the report showed consumers are retrenching, forcing big declines in almost every category of spending.

"This report clearly reflects the crunch in discretionary consumers' spending, which is likely to persist for the foreseeable future," said Ian Shepherdson at High Frequency Economics.

Although lower prices sometimes provide welcom relief, analysts say deflation could be a further blow to a troubled economy.

"The drop in prices across the board is great news for people with money," said Peter Cohan, analyst and consultant with Peter Cohan & Associates.

"But the reason for the drop in prices is very ominous for the future of the economy. That's because companies have overproduced and they now have excess supply gathering dust on their shelves and showrooms."

Cohan added that the weak consumer spending and lower prices will exacerbate the weak economy.

"Unemployed workers have less money to spend and they are not going to get access to the credit that enabled them to buy more goods and services a few years ago," he said.

"Unless companies factor in the drop in demand from the rising ranks of the unemployed, they will need to go back for another round of layoffs, sustaining the vicious downward cycle."

In housing, the report was troubling since many analysts say the overall economy cannot recover until that sector stabilizes. Significantly, the report showed permits to build new homes, an indicator of future activity, dropped 12.0 percent to a pace of 708,000, the lowest level since that data was first published in January 1960, and were down 40.1 percent from October 2007.

"Today's report suggests that housing activity will continue to decline for some time," said Gary Bigg at Bank of America.

"With a variety of headwinds facing the housing industry -- financial market turmoil, rising unemployment and tight credit among them -- a recovery in construction activity is not expected until mid-2009 at the earliest."