* Housing starts fall 0.2 percent in February
* Permits rise 7.7 percent, but single permits fall
* Consumer price index up 0.1 percent, but food prices jump
By Lucia Mutikani
WASHINGTON, March 18 (Reuters) - U.S. inflation was muted in February and housing starts fell for a third straight month, giving the Federal Reserve plenty of room to keep interest rates low even as it scales back the amount of money it is pumping into the economy.
The data, which came as the Fed opened a two-day policy meeting, painted a picture of sluggish economic growth in the first quarter as unseasonably cold weather disrupted activity. A jump in building permits last month, however, also offered cautious optimism for an acceleration once the weather warms up.
"The economy is not too hot and not too cold. Winter was a difficult season for housing and there are no signs that inflation is about to pick up in a meaningful way," said Thomas Costerg, an economist at Standard Chartered Bank in New York.
The Labor Department said its Consumer Price Index nudged up 0.1 percent for the second month in a row as a drop in gasoline prices offset the largest rise in the cost of food in nearly 2-1/2 years.
In the 12 months through February, consumer prices were up only 1.1 percent, slowing from a 1.6 percent rise in January. The February increase was the smallest in four months.
Stripping out the volatile energy and food components, the so-called core CPI rose 0.1 percent for a third straight month. Its 12-month gain held steady at 1.6 percent.
The Fed targets 2 percent inflation and it tracks an index that is running even lower than the CPI. With inflation falling short of their target, Fed officials are likely to bide their time before raising benchmark overnight rates from zero.
Nevertheless, they have indicated they will press forward with plans to wind down a separate bond-buying stimulus program.
"There isn't much to suggest inflation is about to make a move to the upside or downside," said Michael Feroli, an economist at JPMorgan in New York. "This should allow the Fed to remain growth-friendly."
Fed officials are expected to announce another $10 billion cut to their monthly bond-buying program when their meeting concludes on Wednesday.
Separately, a quarterly survey by the Business Roundtable found U.S. chief executive officers somewhat more positive about the economy, including plans for hiring and capital spending over the next six months, although they expect only tepid growth this year.
When asked in a conference call if the CEOs felt they had pricing power, AT&T Chairman and CEO Randall Stephenson said they were not surveyed about pricing but added that he thought most were experiencing "kind of a low inflation environment."
"We have all built our business plans around continued low inflationary expectations," said Stephenson, who is also chairman of the Business Roundtable.
A drought in the western United States likely accounted for the 0.4 percent rise in food prices last month, the largest advance since September 2011. There were big increases in the prices for meat, fish, poultry, eggs, vegetables and fruits.
Within the core CPI, a 0.2 percent gain in the cost of shelter was the major contributor to the rise in the index. There were also increases in medical care, recreation and new vehicle prices. But prices for tobacco, used cars and trucks, apparel and household furnishings and operations fell.
In a separate report, the Commerce Department said housing starts fell 0.2 percent to a seasonally adjusted annual rate of 907,000 units in February. Groundbreaking declined 11.2 percent in January.
Severe winter weather likely constrained building activity last month, with starts in the Northeast region plunging 37.5 percent. However, there were huge increases in the Midwest and South.
Housing lost momentum after a run-up in mortgage rates last summer. High prices and a lack of properties on the market are also holding back buying activity.
"We are probably due for a bounce in the coming months as the weather normalizes, but questions linger about the underlying pace of starts once the catch-up period is over," said Guy Berger, an economist at RBS in Stamford, Connecticut.
Groundbreaking for single-family homes, the largest segment of the market, rose 0.3 percent last month. Starts for the volatile multi-family homes segment fell 1.2 percent.
Permits to build homes increased 7.7 percent to a 1.02 million-unit pace, ending three straight months of declines. Permits for single-family homes, however, fell 1.8 percent, while those for multifamily units surged 24.3 percent.
"The gap between starts and permits is widening and since builders don't pay the money for permits unless they expect to do something with them, you can bet that once the warm weather returns, so will the bulldozers," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
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