New government numbers show housing starts in the U.S. surged in October, as a measure of consumer prices also rose, likely paving the way for the Fed to raise interest rates before the year is out.

Groundbreaking on homes jumped 25.5% from the month before to an annual pace of 1.32 million units, according to the Commerce Department. That's the highest level since August 2007 and far exceeded analysts’ expectations.

The month-over-month gain is the largest since July 1982, propelled by 68.8% increase in the volatile multi-family home category. The overall hike also erases an unexpected 9.5% drop in September.

Single-family home starts, the largest share of the market, rose 10.7% to an annual rate of 869,000, its highest level since October 2007.

The number of building permits issued, an indicator of future home construction, edged up 0.3%. Single family permits increased 2.7% while multi-family permits fell 3.3%.

While this latest report is no doubt welcome news, it will be more telling in the days ahead, said Josh Nye, economist at RBC Economics Research.

“Next week’s data on new and existing home sales in October, both coming off of decent gains in September, will provide further clarity on how the residential sector is shaping up in the final quarter of the year,” he said. “With the housing sector potentially providing an even greater contribution to growth following disappointing declines in each of the last two quarters, risks to our forecast for a 2.3% gain in Q4 GDP are skewed higher."

RBC expects residential investment will continue to add to overall economic growth next year amid a strong labor market and decent housing affordability.

However, not everyone is cheering.

“With increased volatility month to month, the housing market has struggled to gain momentum beyond plateau levels reached more than five years ago," said Lindsey Piegza, chief economist at Stifel Fixed Income. “With moderate job creation and still-modest wage growth, consumers’ appetite for large ticket purchases, such as homes and automobiles, has come under pressure, a worrisome scenario in the wake of the most recent backup in rates, which could further dampen demand.”

Consumer Prices Increase Closer to Fed Target

Meantime, the Consumer Price Index, a gauge of what consumers pay for everything from transportation and food to medical care rose 0.4% in October from the month before. The annual rate moved closer to a level that many analysts believe will spur the Federal Reserve to increase interest rates next month.

The CPI also was up 1.6% compared to October 2015, its largest 12-month increase in two years.

The month-over-month hike in the CPI was driven by increases in costs for shelter and gasoline. Gasoline jumped 7% and accounted for more than half of the increase in the overall measure. The shelter index increased 0.4% for the second straight month.

This news came as Federal Reserve Chair Janet Yellen began testifying to the House Joint Economic Committee Thursday morning, where she highlighted recent improvements in the U.S. economy and expectations for moderate growth.

While stopping short of promising a rate increase at the meeting of the Federal Open Market Committee just four weeks from now, Yelled noted a rate increase could come "relatively soon if incoming data provide some further evidence of continued progress toward the committee’s objectives."

In other words, barring an indication of momentum tilting to the downside, even maintaining the moderate status quo should be enough to sway committee members in favor of a second-round hike by the end of the year, according to Piegza.

“The chairman's reserved comments regarding the intended ‘gradual’ pathway for [higher interest] rates suggest lingering uncertainty surrounding the true health of the U.S. economy and a lack of conviction on the part of policy officials,” she said. “Not that we ever expect clear, concise comments from any Fed officials, let alone the chairman herself, but something along the lines of, ‘gosh darn is the economy strong, heck yeah we're going to raise rates in December’ would be a refreshing change from the Fed-speak double-talk.”

RBC Assistant Chief Economist Paul Ferley pointed out that core inflation, which omits volatile food and energy prices, has averaged closer to the Fed’s objective for most of this year, at 2.2% over the first three quarters. The October data remained in line with this rate, dropping only marginally lower to 2.1%.

“Indications that inflation is moving in the desired direction and with other reports this week indicating that economic growth is maintaining an above-average pace provides strong reasons for the Fed to resume tightening,” he said. “Assuming that financial markets remain orderly, the Federal Funds range is expected to be increased 25 basis points to 0.50% to 0.75% at the next FOMC meeting Dec. 14.”