Autos Lift U.S. Retail Sales; Inflation Perks Up

A jump in auto and gasoline sales boosted U.S. retailers in June, while a measure of inflation soared by twice as much as expected, bolstering hopes the economy was finally beginning a modest recovery.

Commerce Department data Tuesday showed sales at U.S. retailers rose 0.6 percent from a month earlier, ahead of economists' expectations for a 0.4 percent advance.

However, outside of autos and gas stations the sales results were disappointingly weak, suggesting consumers remained wary of stepping up discretionary spending despite signs the recession may be drawing to a close.

A separate report from the Labor Department showed producer prices jumped 1.8 percent last month, far outstripping forecasts for a 0.9 percent gain.

Another set of data showed business inventories fell for a ninth consecutive month, pressured by a steep drop in stocks of motor vehicles and parts.

U.S. stock indexes fell slightly, while U.S. government debt prices extended losses. The euro held on to slender gains vs dollar, but the dollar extended gains against the yen.

Investor attention was focused on quarterly earnings from investment bank Goldman Sachs Group, which were much stronger than expected.

Excluding autos and parts, which recorded a 2.3 percent gain, retail sales were up a more modest 0.3 percent, short of analysts' expectations for a 0.5 percent advance.

"It's not horrible, but clearly there's not much of an acceleration," said Keith Hembre, chief economist at First American Funds in Minneapolis.

"That reflects the ongoing weakness in income levels. It looks like gas and vehicle sales were really the big driver, accounting for just about all of the overall increase."

Gasoline stations showed strong gains, helped by rising prices. The average price per gallon of gas rose to $2.68 in June from $2.32 in May, according to government data.

Excluding both autos and gasoline, retail sales were down 0.2 percent, the fourth consecutive monthly decline. Department stores and restaurants were among the laggards.

Inflation Fleeting?

The Producer Price Index, which measures prices received by farms, factories and refineries, recorded its steepest gain since November 2007, the Labor Department said.

Core prices, which strip out volatile food and energy costs, rose a much greater-than-expected 0.5 percent, boosted by cars and trucks. Analysts polled by Reuters were looking for a 0.1 percent increase in the core PPI.

Energy prices rose 6.6 percent in June as gasoline costs surged 18.5 percent. Both were the biggest rises since November 2007.

A sluggish economy plus inflationary pressure would normally be considered a dangerous stagflationary mix, but economists see little reason to fret over price pressures when there is so much slack in the economy.

What Does $1 Trillion Look Like? Companies at Greatest Risk For Default The Highest Paid Chief Executives Surprising Stock Market Indicators

Unemployment is high and likely to keep rising, which keeps wages in check. Energy prices, the primary cause of last month's rise in inflation, have come down in the past two weeks. That should help cool prices this month.

Light truck prices rose 3.4 percent, the largest gain since November 2006, while passenger car prices increased 2 percent, the steepest rise since September of that year.

Compared with the same period last year, however, producer prices fell 4.6 percent.

U.S. business inventories fell 1 percent in May, according to Commerce Department data. That was steeper than the 0.8 percent decline that economists had predicted.

The inventory of motor vehicles and parts dropped 4.2 percent in May, the biggest decrease since a 5.4 percent drop in July 2005.

Companies have been purging inventory as the weakening economy crushed demand, and that contributed to the deepening of the recession in late 2008 and early 2009. Many economists expect that pattern to reverse soon, which should help lift economic growth in the second half of the year.

Copyright 2009 Reuters. Click for restrictions.