U.S. retail sales point to pick-up in demand, but inflation subdued

By Lucia Mutikani

WASHINGTON (Reuters) - A gauge of U.S. consumer spending rose more than expected in October as households bought a range of goods, suggesting upside momentum in the economy early in the fourth quarter.

Wednesday's report was the latest sign a 16-day government shutdown last month had a limited impact on the economy and should ease concerns about the holiday shopping season.

"It reinforces the current narrative of sustained growth momentum in the recovery going into the last quarter of the year, even at a time when the economy was contending with the headwinds created by the government shutdown," said Millan Mulraine, senior economist at TD Securities in New York.

Despite demand picking up, inflation is still subdued, which should give the Federal Reserve latitude to maintain its current pace of bond purchases for a while.

Retail sales excluding automobiles, gasoline and building materials increased 0.5 percent last month after advancing 0.3 percent in September, the Commerce Department said.

Economists polled by Reuters had expected so-called core sales, which correspond most closely with the consumer spending component of gross domestic product, to rise 0.3 percent.

The better-than-expected increase in core retail sales suggested consumer spending would likely accelerate from a two-year low touched in the third quarter and probably limit downside risks to economic growth during the fourth quarter.

The report added to data such as nonfarm payrolls and manufacturing that have suggested the partial shutdown of the federal government had not inflicted widespread damage on the economy as initially feared.

Economists said fourth-quarter consumer spending was tracking an annual rate of about 2 percent, after increasing at a 1.5 percent pace in the July-September.

"It takes out some of the downside risk to our fourth-quarter GDP call of 1.5 percent," said Michael Feroli, an economist at JPMorgan in New York.

While consumer spending is picking up, the housing market is slowing after helping to push the economy forward.

A separate report from the National Association of Realtors showed home resales fell 3.2 percent in October, declining for a second straight month, as high mortgage rates and tight supply weighed. But the median price of a previously owned home was up 12.8 percent from a year ago.

Increasing home values and soaring stock market prices are helping to support consumer spending.

Still, the firming domestic demand is not enough to generate some inflation in the economy. In a third report, the Labor Department said its Consumer Price Index slipped 0.1 percent last month as gasoline prices fell sharply, after rising 0.2 percent in September.

In the 12 months through October, the CPI increased 1.0 percent, the smallest gain since October 2009. It had advanced 1.2 percent in September.

Economists polled by Reuters had forecast consumer prices to be unchanged last month.

U.S. stocks were trading modestly higher on the retail sales and inflation data. Prices for U.S. Treasury debt were mostly up and the dollar gained against a basket of currencies.

PRICES HELD IN CHECK

Stripping out the volatile energy and food components, the so-called core CPI edged up 0.1 percent, rising by the same margin for a third consecutive month. That could heighten concerns among some U.S. central bank officials about inflation being too low.

Over the past 12 months, the core CPI increased 1.7 percent, matching the prior month's rise.

The Fed targets 2 percent inflation, although it tracks a gauge that tends to run a bit below the CPI.

The absence of inflation in the economy suggests the Fed will probably stick to its monthly $85 billion bond buying program at least through early 2014 as it tries to stimulate demand through low interest rates.

"With limited inflation pressure and even perhaps a whiff of deflation, the Fed isn't likely to feel any urgency to pull in the reins on policy," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

Fed Chairman Ben Bernanke said on Tuesday the U.S. central bank would maintain its ultra-easy monetary policy for as long as needed, adding that policymakers wanted evidence of durable job growth before scaling back bond purchases.

Core retail sales last month were bolstered by sturdy gains in receipts at clothing, furniture, electronics and sporting goods shops, among others.

Sales at electronics and appliance stores rose by the most since April, suggesting a residual boost from the introduction of Apple's new iPhone the previous month.

(Reporting by Lucia Mutikani; Additional reporting by Margaret Chadbourn; Editing by Andrea Ricci)