After two straight months of declines, U.S. housing starts bounced back sharply in July, suggesting that the economy is gaining some momentum, according to a Reuters report based on Commerce Department data.

Groundbreaking on single-family homes in the U.S. was up 15.7 percent in July to a seasonally adjusted annual rate of 1.09 million units, which exceeded the forecasted 969,000 units.

Housing starts were way up from June, when starts starts dropped by 9.3 percent from the prior month, while building permits were down 4.2 percent, Forbes reported.

"July's spike in new construction and the increase in permits is the shot in the arm that the housing industry was looking for," said Bill Banfield, vice president of Quicken Loans. "Now that construction is more in line with homebuilder confidence, the end of the lull that has been holding down the market since the beginning of the year may finally be here."

Despite the jump in housing starts, a lack of supply has caused house prices to jump, potentially pricing first-time homebuyers out of the market.

The Labor Department said in a separate report that its Consumer Price Index was up 0.1 percent in July, as rising food and rent costs were buoyed by falling energy costs. Over the last 12 months, the CPI is up by 2 percent.

"The housing market's recent weakness appears to be reversing while the labor market appears to be improving," said Dan Greenhaus, chief strategist with BGIT. "And all of this comes with only modestly building inflationary pressures. As such, we think the Fed will find these data further supportive of the go-it-slow approach to exiting its accommodative policies."

Analysts expect the Federal Reserve to keep its benchmark interest rate level until the first half of 2015. That rate has been close to zero since December 2008, trying to help the economy return to strength.