Sales by U.S. retailers rose 1.4 percent in May as consumers shrugged off higher gasoline prices and increased their spending on cars, clothing and building materials, a Commerce Department report showed.
Import prices, which are monitored closely by Federal Reserve policy-makers as a potential source of inflation, rose for the fourth straight month on higher petroleum costs.
The dollar initially rallied and U.S. Treasury bond prices fell, as the data helped further cement a view that the Federal Reserve is unlikely to cut interest rates this year and may even raise them at some point to help cool inflation.
"The economy is coming back stronger than anybody could imagine," said Mark Vitner, economist at Wachovia Securities in Charlotte, North Carolina. "We were probably one of the most optimistic groups on the street, and the economy is surpassing even our expectations."
The increase in retail sales was the biggest since January 2006 and was far stronger than the 0.6 percent increase predicted by Wall Street economists in a Reuters poll. April sales were revised to a 0.1 percent fall from a 0.2 percent decline.
Excluding automobiles, which account for 20 percent of total retail business, sales rose 1.3 percent following a 0.1 percent April rise. Analysts had expected a 0.7 percent increase excluding motor vehicles and parts sales.
Sales at gasoline stations rose 3.8 percent in their strongest monthly increase since April 2006, but excluding gasoline, retail sales still rose a healthy 1.2 percent.
U.S. import prices rose 0.9 percent in May, according to a Labor Department report. Wall Street economists were expecting a 0.3 percent gain in import prices following an upwardly revised 1.4 percent increase in April.
Imported petroleum prices climbed 2.7 percent in May, the fourth straight monthly gain, after a bigger 6.6 percent rise in April. But the department said that while oil prices were up over the last several months, they were down 4.6 percent over the past twelve months.
Meanwhile, the Commerce Department said the increase in stocks on hand in April came after inventories were unchanged in March and was the biggest gain since a matching 0.4 percent rise in September 2006, the Commerce Department said.
Business sales at retailers, manufacturers and wholesalers rose 0.7 percent in April to $1.1 trillion.
Financial markets had looked for a 0.3 percent rise in inventories after a previously reported reading of a 0.1 percent fall in March.
The stocks-to-sales ratio -- the number of months it would take to deplete inventories at the current sales pace -- fell to 1.27 months from 1.28 months in March.