Retail sales drop, inflation muted

By Glenn Somerville

WASHINGTON (Reuters) - Retail sales tumbled in April as high gasoline prices pinched spending elsewhere, but signs that inflation remained in check aside from energy costs offered reassurance the economy was slowing in an orderly way.

A Commerce Department report on Friday showed sales by U.S. retailers fell 0.2 percent to a seasonally adjusted $372.03 billion last month, hurt by a one-two punch of soaring gasoline prices and a slumping housing market.

But separately, the Labor Department said that while costlier energy pushed producer prices up 0.7 percent in April, the so-called core rate that strips out food and energy costs was unchanged from March.

"Bottom line, today's data reinforces the view that inflation is contained while the economy is showing signs of a slowdown," said Alex Beuzelin, an analyst with Ruesch International in Washington.

"It also supports the view that the Fed (Federal Reserve) will have to cut rates sometime this year," he added.

The U.S. central bank's policy-setting committee met this week and decided to keep rates steady for now, citing a potential for inflation to rise. That view was not backed up by Friday's data on producer prices, which essentially measures prices at the factory door and at the farm gate.

RATE CUT SPECULATION

U.S. government bonds initially rose after the soft data on retail sales and underlying producer price inflation boosted hopes that the Fed could cut rates earlier than expected. However, they turned negative in early afternoon trading.

Stock prices rebounded from a sharp drop on Thursday as investors bet the chances for an official interest-rate cut later in the year were bolstered.

Former U.S. Fed Chairman Alan Greenspan, in an address by satellite link to a Singapore audience, said on Friday he considered there was a one-in-three chance the U.S. economy could slip into recession this year. That was a repeat of a comment he made in March that rattled markets at the time.

Another report from the Commerce Department, on March business inventories, showed the inventory-to-sales ratio that gauges how long it would take to sell off stocks at the current sales pace dropped to 1.27 months' worth from 1.29 in February.

The inventories report is a lagging one, but it implied room for companies to keep expanding output.

The retail sales report showed widespread declines in April sales, for everything from clothing to sporting goods and spending at restaurants. Spending on building materials took its sharpest tumble in more than four years and new-car sales fell by the largest amount since mid-2006.

WARY CONSUMERS

"Once again you are seeing that housing and higher gasoline prices appear to be weighing on the consumer," said Kevin Flanagan, a fixed-income strategist for global wealth management with Morgan Stanley, Purchase in New York.