Signals Are Mixed as U.S. Retail Sales Rise

Inflation Concern Grows As Economy Recovers

Higher prices for gasoline, lumber and food helped boost the value of U.S. retail sales last month, adding to concerns that the Federal Reserve may have to raise interest rates rapidly to control inflation, analysts said yesterday.

Retail sales rose 1.2 percent in May, reflecting consumers' willingness to spend more for a wide variety of goods, the Commerce Department reported.

While that bodes well for the strengthening U.S. economic recovery, it also adds to the reasons Federal Reserve officials are warning that they may have to raise interest rates more aggressively than many investors had expected.

"The retail sales data dovetail with some heightened concern about inflation," said Raymond W. Stone, an economist with Stone & McCarthy Research Associates. "The inflation outlook is worse now than six months ago. . . . [Fed officials] have to worry about whether that gets ingrained in expectations" that prices will keep rising.

More than half the increase in the retail sales figures probably resulted from consumers paying higher prices for goods, rather than from them buying more goods, according to Stone's analysis of the sales figures. The value of sales at gasoline stations alone rose 4 percent, accounting for about one-fourth of the total increase, he said.

Average gasoline prices spiked last month to a peak of $2.054 for a gallon of unleaded regular, but have receded since then, dropping yesterday to $1.99, according to AAA's Web site.

Several Fed policymakers, including Chairman Alan Greenspan, noted last week the recent spate of price increases and indicated that they will raise rates as briskly as necessary to control inflation.

Greenspan may amplify on his comments today when he testifies at a Senate Banking Committee confirmation hearing on his nomination for a fifth term as Fed chairman. He is scheduled to appear a few hours after the Labor Department is to release the consumer price index for May, another piece of the inflation puzzle that Fed officials will consider when they next meet in two weeks.

Stock and bond prices fell yesterday after the retail sales figures were released. Because financial markets were closed Friday in observance of former President Ronald Reagan's funeral, yesterday was also the first trading day since two regional Fed bank presidents chimed in publicly to suggest that inflation risks may be rising.

Fed officials have signaled strongly that they will raise their benchmark short-term rate, the Federal funds rate, at their next meeting. Analysts and investors generally expect the Fed's policymaking committee to raise the rate to 1.25 percent from 1 percent, which would be the first increase in four years.