Gasoline prices boost retail sales and inflation

WASHINGTON Thu Dec 13, 2007 2:25pm EST

1 of 2. A Mobil gasoline tank truck stops to load gasoline into storage tanks at a Mobil gas station in Burbank, California November 16, 2007. Producer prices surged at a 34-year high rate of 3.2 percent in November on a record rise in gasoline prices, the Labor Department said on Thursday.

Credit: Reuters/Fred Prouser

WASHINGTON (Reuters) - Retail sales were solid in November as the holiday shopping season got underway, but a good portion of consumer dollars went to higher-priced gasoline, which also pushed wholesale inflation up by the largest amount in 34 years.

The Commerce Department said on Thursday that retail sales rose 1.2 percent in November, twice the increase Wall Street economists were expecting and a bright sign that consumers, who fuel two-thirds of economic growth, are still hanging in as the economy wades through credit and housing market turmoil.

"These numbers should put some of the fears to rest that consumers are going to stay at home this holiday season. That's absolutely not going to happen," said Mark Vitner, an economist at Wachovia Securities in Charlotte, North Carolina.

Separately, the Labor Department said its producer price index, a gauge of prices received by farms, factories and refineries, shot up 3.2 percent as gasoline prices surged a record 34.8 percent.

That was the biggest monthly increase since August 1973 and was well ahead of analysts' expectations of a 1.5 percent gain.

The combination of higher inflation and a stronger-than-expected consumer sector weighed on prices of U.S. government debt as traders saw it diminishing chances of further interest rate cuts from the Federal Reserve.

U.S. stocks fell on Thursday as doubts grew about a plan unveiled on Wednesday by global central banks to unfreeze credit markets hit hard by the prolonged housing slump and related subprime mortgage disaster.

Excluding food and energy, so-called core inflation pressures were still evident. The index rose twice as much as expected and by the biggest amount since February.

"Today's report underscores the violence of the latest energy price shock and the need for the Fed to be vigilant for any resulting pass-through to core consumer prices as we move into 2008," said Kenneth Beauchemin, economist at Global Insight.

A separate report from the Commerce Department of a buildup in retail inventories of building materials and home furnishings also showed the impact of the housing slump.

In October, stocks of building materials and garden equipment and supplies rose 1.1 percent while inventories at furniture, home furnishing, electrical supply and appliance stores gained the most since October of 2003.

GASOLINE PRICES SURGE

Although the retail sales report showed steady spending across the board, higher gasoline prices helped boost the overall sales picture.

Gasoline station sales climbed 6.8 percent, the largest gain since September 2005 in the wake of Hurricane Katrina. They were 25 percent above year-ago levels.

"There's a question as to how much of the gain is pure inflation," said Pierre Ellis, senior economist at Decision Economics in New York. "Still, real consumer spending growth is likely to be much firmer than generally thought.

"The economy is not slipping into crisis, but the outlook is still cloudy," he added.

U.S. retailers had been pleasantly surprised as the holiday shopping season got underway late last month, considering the high gasoline prices households were facing and the deep slump in the housing sector.

The housing slump is expected to slow the U.S. economy in the fourth quarter and the start of next year, with some fearing a recession. But a great deal depends on whether U.S. consumers continue to hold up.

In fact, so-called core retail sales, which strip out cars, gasoline and building materials, were up 1.1 percent, compared with a 0.2 percent gain in October.

Purchases of motor vehicles and parts, which make up around one-fifth of total sales, fell 1 percent last month, the Commerce Department data showed.

(Additional reporting by Alister Bull, Mark Felsenthal and Nancy Waitz; writing by Tim Ahmann and Joanne Morrison; Editing by Dan Grebler)

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