U.S. housing starts surged to an eight-month high in July, suggesting the nation's housing market recovery was back on track after stalling in the second half of last year.

While the rebound points to sustained economic strength, other data on Tuesday showed inflation largely under wraps, which could give the Federal Reserve room to maintain its ultra-easy monetary policy stance for a bit longer.

"The Fed will find these data further supportive of the go-it-slow approach to exiting its accommodative policies," said Dan Greenhaus, chief strategist at BTIG in New York.

Groundbreaking for new housing jumped 15.7 percent last month to a seasonally adjusted 1.09-million unit annual pace, the highest level since November, the Commerce Department said. The gain snapped two straight months of declines and beat economists' expectations for a rise to only a 969,000-unit rate.

It was the latest sign the market was regaining its footing after being slammed by a run-up in interest rates last year. A shortage of properties for sale has also lifted prices, pushing housing out of the reach of many first-time buyers.

Separately, the Labor Department said its Consumer Price Index edged up 0.1 percent last month as declining energy costs partially offset increases in food and rents. The CPI had increased 0.3 percent in June.

In the 12 months through July, the CPI increased 2.0 percent after advancing 2.1 percent in June.

While the so-called core CPI, which strips out volatile food and energy costs, ticked up 0.1 percent for a second straight month, economists said there was no evidence the underlying trend in inflation was shifting lower. Rents, which account for more than a third of the CPI basket, increased 0.3 percent in July and were up 2.9 percent from a year ago.

In the year through July, the core CPI was up 1.9 percent.

The Fed targets 2 percent inflation, but it tracks an index that is running lower than the CPI.

FED WATCHING WAGES

Most economists do not expect the U.S. central bank to raise benchmark rates until around the middle of next year, given sluggish wage growth. It has kept rates near zero since December 2008.

Average weekly earnings adjusted for inflation rose 0.3 percent year-on-year in July after a 0.2 percent dip in June, the Labor Department said.

"Fed Chair (Janet) Yellen considers income growth as the key to future inflation issues and since she doesn't see any wage gains just yet, she will likely continue on course," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

"As for investors, limited inflation and stronger housing are nothing but good news since they imply good growth ahead without the Fed having to move prematurely."

U.S. stocks rose on the data, with homebuilders such as Pulte Group (PHM.N) and DR Horton (DHI.N) rallying. The PHLX housing sector index .HGX was up 1.7 percent in late morning trading, outperforming the broader market.

In another bright sign, home improvement retailer Home Depot (HD.N) reported second-quarter earnings that topped Wall Street's expectations and it raised its full-year profit forecast, sending its shares up 5.9 percent.

Groundbreaking for single-family homes, the largest part of the market, increased 8.3 percent in July to a seven-month high. Single-family starts in the South, where about half of the single-family construction takes place, rebounded 16.9 percent after dropping sharply in June.

Starts for the volatile multi-family homes segment jumped 33 percent to the highest level since January 2006. This market is being buoyed by a shift towards renting, as many prospective buyers give up on the dream of owning a house.

Building permits increased 8.1 percent, the largest gain since April 2013. Permits for single-family homes rose 0.9 percent to an eight-month high, while permits for multi-family housing soared 23.6 percent.

"The recovery in both starts and permits is a welcome development that ... puts us back on a modest trend for residential investment activity," said Bricklin Dwyer, an economist at BNP Paribas in New York.

(Reporting by Lucia Mutikani; Editing by Paul Simao)