U.S. consumer prices edged up in September, the number of workers filing new claims for jobless benefits dropped to a nine-month low last week and New York state factory activity perked up this month, more proof the economy was healing after a protracted recession.

This is supportive for a V-shaped recovery. It is also supportive of those who say the (government's economic) stimulus is working. We just have to be patient, Christopher Low, chief economist at FTN Financial in New York said of the slew of data released on Thursday.

In a report that pointed to scant inflation pressure but some easing in the downward pressure on prices, the Labor Department said the Consumer Price Index rose 0.2 percent last month, matching analysts' expectations, after increasing 0.4 percent in August.

The department also said initial claims for state unemployment aid fell 10,000 to 514,000 last week, a second straight weekly dropped that hinted at some easing in the pace of layoffs. Economists had expected a slight rise.

A third report from the New York Federal Reserve Bank showed a gauge of New York state manufacturing activity rising unexpectedly to hit its highest level in five years on surging new orders, shipments and employment.

Despite the positive data, stocks on Wall Street traded lower as investors were unimpressed with quarterly results from Goldman Sachs Group and Citigroup Inc after a strong showing from JPMorgan on Wednesday.

DEFLATION RISKS EASING?

Fed Vice Chairman Donald Kohn said earlier this week that an enormous amount of economic slack was likely to keep prices under pressure, and core prices have been trending lower even though the headline CPI already appears to have bottomed out.

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Today's figures won't shift the argument about inflation risks at the Fed. They don't show deflation, but nor do they show sufficient inflation pressures to make the doves want to tighten soon, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

A Reuters poll of economists released on Thursday indicated the Fed would likely hold interest rates at their current level near zero at least until the middle of next year.

Consumer prices last month were restrained by weak food and housing costs. Compared to September last year, prices were down 1.3 percent, with the food index declining from a year earlier for the first time in 40 years.

Stripping out volatile energy and food prices, the closely watched core measure of inflation rose 0.2 percent from August, after inching up just 0.1 percent a month earlier.

A 0.4 percent increase in new vehicle prices following the expiration of the popular cash for clunkers program contributed to the rise. The program, which pushed down car prices by 1.3 percent in August, had offered discounts to consumers who traded in old gas-guzzling cars for new, fuel-efficient ones.

In contrast, rental and owners equivalent rent indexes recorded their first declines since 1992, which economists said portended tame inflation ahead.

The huge excess supply in the housing market is putting downward pressure on rents, said Zach Pandl, an economist at Nomura Securities International in New York. The inflation outlook is quite negative.

MIXED SIGNALS

In a further sign hinting at some stability in the labor market, the number of people collecting unemployment benefits after an initial week of aid dropped 75,000 to 5.99 million in the week ended October 3. It was the first time these continuing claims had been below the 6 million mark since late March.

While a sharp increase in the New York Fed's Empire State business conditions index fueled optimism on growth prospects, that optimism was tempered by a report showing factory activity in the country's Mid-Atlantic region grew less than expected. The Philadelphia Fed said its business activity index slipped to 11.5 in October from 14.1 in September. Economists had expected a reading of 12.0.

U.S. mortgage foreclosure filings fell for a second straight month in September, but remained near a record high, amid ongoing and sweeping efforts to keep borrowers in their homes, real estate data firm RealtyTrac said.

(Additional reporting by Burton Frierson and Richard Leong in New York; Editing by Andrea Ricci)

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