Price, retail data paint stagflationary picture

By Burton Frierson

NEW YORK (Reuters) - Weak U.S. retail sales and a rise in producer prices to their highest annual rate in 27 years provided further evidence of "stagflation" in the world's largest economy on Tuesday.

Federal Reserve Chairman Ben Bernanke reinforced the troubled outlook, saying the economy faced significant downside risks, even though the Fed -- the U.S. central bank -- raised its forecast for growth as well as for inflation this year.

U.S. retail sales rose a less-than-expected 0.1 percent in June, as auto sales posted their biggest drop in more than two years, government data showed, leading investors to lower bets that the Fed would raise benchmark interest rates this year.

Also on Tuesday, General Motors Corp said it would cut labor costs, sell assets and borrow at least $2 billion to bolster finances in the face of plummeting sales.

The U.S. Labor Department said producer prices over the last 12 months jumped 9.2 percent, the biggest increase since a 10.4 percent gain in June 1981 when the United States was last mired in a stagflationary period of low growth and high inflation.

"The PPI number is just outrageous," said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York.

On Wall Street, U.S. stocks fell on persistent worries about the health of the financial system, while oil prices dropped on concerns about the U.S. economy.

The U.S. dollar fell against a broad basket of currencies but managed to recover from a record low against the euro seen overnight.