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Retail sales soften in Oct. along with inflation

The Baltimore Sun

Spending is slowing - but so is inflation, offering the Federal Reserve more room to stimulate the economy by lowering interest rates next month, if it wants.

Retail sales softened in October, rising 0.2 percent after a 0.7 percent gain in the previous month, the Commerce Department said yesterday. The report underscored analysts' expectations that consumers will be more reluctant to spend freely over the holiday season. It was the smallest sales gain since a 0.1 percent rise in August.

"The overall picture is weak," said Joshua Shapiro, chief U.S. economist at the research firm MFR Inc. "The consumer is notching it back quite a bit."

A beleaguered housing market and rising energy prices threaten to slow economic activity in the fourth quarter, as consumers find their pocketbooks strained by expensive necessities such as gasoline and heating oil.

Department stores were hit hard in October, as warmer-than-normal weather hurt sales of winter clothing. Furniture sales continued to slow, showing their third straight month of declines. Electronics, apparel and sporting goods all sold at a middling pace.

The Fed has hinted that it will be reluctant to cut its benchmark interest rate when the central bank meets Dec. 11, discouraging some analysts who believe a rate cut could stimulate growth.

But prices at the wholesale level were restrained last month, possibly reassuring Fed officials who are wary of inflation risks. Businesses paid less for energy in October despite rising oil prices, though the recent run-up in crude oil could reverse that trend this month.

The Producer Price Index rose 0.1 percent in October, compared with a 1.1 percent gain in September, the Labor Department said yesterday. The core index, which offers a fuller snapshot of inflation by excluding volatile food and energy costs, was unchanged after rising 0.1 percent in September

Analysts have predicted increased price pressures as businesses are forced to pay higher energy costs. The report gives the Fed more leeway to lower interest rates further, provided there is no resurgence in inflation in the prices of consumer goods. Economists will have a clearer picture of inflation after the government releases the Consumer Price Index today.

For the year through October, core wholesale prices rose 2.5 percent, the biggest increase since September 2005.

Separately, inventories at American businesses rose 0.4 percent in September, with the largest gains among manufacturers and wholesalers.

The increase followed a 0.3 percent rise in August. The inventory report, released yesterday by the Commerce Department, suggests that businesses beefed up production levels.

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