By Jeannine Aversa
The Associated Press

WASHINGTON - Consumer prices held steady and big industry boosted production for the first time since February, a double dose of good news for the wobbly economy.

The flat reading in the Labor Department's Consumer Price Index for May, which came after a 0.3 percent decline in April, eased worries that the country could be headed for deflation, an economically dangerous long-term slide in prices, economists said.

The price index report "should help alleviate some of the nagging fears of deflation," said Mark Vitner, economist at Wachovia.

Production at the nation's factories, mines and utilities nudged up by 0.1 percent last month after dropping by a sharp 0.6 percent in both March and April, the Federal Reserve said in a report that economists viewed as a sign the nation's battered industrial sector could be turning a corner.

Also, the Commerce Department reported that housing construction bounced back in May despite rainy weather in some parts of the country, escalating by 6.1 percent to an annual rate of 1.73 million. That performance came after a 6.3 percent decline in April.

The latest batch of economic reports Tuesday raised hopes that the lumbering economy would pick up its pace in the second half of this year.

At the White House, presidential spokesman Ari Fleischer said the CPI report suggested that deflation is "not a serious worry" and that President Bush "is hopeful the signs of economic growth will continue to gather steam."

Still, many economists believe the Federal Reserve will cut short-term interest rates, now at a 41-year low of 1.25 percent, by at least a quarter of a percentage point at its meeting next Tuesday and Wednesday. The thinking is that the Fed wants to energize the economy and help ward off even the threat of deflation.

Although Fed policy-makers say the chance of deflation is remote, the central bank must be alert because of deflation's potential to wreck the economy, economists warned.

The United States' last serious deflation occurred during the Great Depression. A bad case of deflation can lead to widespread price declines, job losses and pay cuts.