NEW YORK (CNN/Money) - Housing starts posted the biggest jump in seven years in May, according to government data Tuesday, while another report showed prices unexpectedly unchanged in the latest snapshot of a U.S. economy being supported by consumer spending.

The Commerce Department report showed May housing starts rose to an annual rate of 1.733 million from a revised 1.553 million pace in April, a jump of 11.6 percent. That's the biggest month-to-month increase since the July 1995 climb of 14 percent, and it beat the forecast of 1.6 million starts in May by analysts surveyed by Briefing.com.

New home construction is an important driver of economic activity due to demand for appliances and other consumer goods that accompanies it.

Building permits, a more leading indicator of demand for new homes, showed an unexpected increase in May as well, rising 2.6 percent to an annual rate of 1.674 million from a revised 1.631 million in April. Analysts expected permits to fall to a 1.615 million rate.

Steve East, chief economist with Friedman Billing & Ramsey, told CNNfn's Money Morning that the economic data shows the continued strength in housing, which he said has been one of the two pillars, along with consumer spending, holding the U.S. economy up while business spending has lagged.

"The housing sector continues to do what it's been doing for over a year -- provide shelter not only for people but for the economy from the storm of the recession," East said. "Business spending is still negative and we're not having all cylinders firing, and it's important that the cylinders that have been firing keep firing."

While the strength of housing market is not new, the latest numbers still were able to surprise observers.

"I guess it's a little stronger than I was expecting, although I thought that builders had reason to remain optimistic, even though consumer sentiment has supposedly dipped," said Kenneth Simonson, chief economist for the trade group Associated General Contractors of America.

Simonson and John Silvia, chief economist for Wachovia Securities, said that demand for new housing is being helped, not hurt, by a weak stock market, as consumers are investing in upgrading their homes rather than in stocks. Silvia said that there is a risk to some of the builders if the stock market does show signs of life in three-to-four months at the time that some of the homes now being started come onto the market.

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"Some speculative subdivisions are probably getting ahead of the market. By the time they get on board, people's attitude may have changed," he said. "The new home market is going to respond pretty darn quickly (to an upturn in the stock market). It's the marginal subdivisions that will be really hurt, those less attractive locations in term of convenience or school district."

But Silvia said even with that risk, he doesn't expect there to be a wide-spread bursting of a housing market bubble and a steep drop in housing prices, similar to the Nasdaq decline of the last two years, although there could be specific communities or regions which suffer declines.

Separately, the Labor Department's consumer price index, which measures retail prices paid by consumers, was unchanged in May, due largely to a 0.7 percent drop in energy prices. Analysts expected a 0.1 percent rise in the CPI. The index had risen 0.5 percent in April.

The so-called "core-CPI," which excludes often-volatile food and energy prices, rose 0.2 percent in May, in line with analysts' forecasts and down from April's 0.3 increase.

"Both these numbers are about everything investors could want to see in a morning, low inflation and an indication of good growth," East said.

He said he doesn't believe these latest economic data will prompt any change in interest rates by the Federal Reserve.

"The Fed isn't out there to keep growth low; it's out there to keep inflation low and have growth as quick as it can be," East said. "The fact that we have got a strong housing number doesn't mean they have to raise interest rates. The fact we have a low inflation number means they can keep interest rates low."