Consumers spent more in April, but most of their money went to pay higher food and gas prices.
The rising cost of basic necessities is threatening to slow economic growth in the coming months. But hiring gains are the best in five years, commodity prices are easing, and gas prices could follow in the weeks ahead.
Economists say the stronger job market will offset the impact of inflation and drive the economy in the second half of the year.
"If this is the full hit from the rise in gas prices, it is no big deal," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.
More expensive gas drove retail sales up 0.5 percent in April, the 10th straight month of gains. But excluding gas station sales, the increase was only 0.2 percent.
Companies paid 0.7 percent more for raw materials and factory goods in April, mostly because energy prices jumped for the seventh straight month. But after taking out volatile food and energy categories, the core index increased only 0.3 percent, the same gain as the previous month.
Pump prices have been surging in recent months. The nationwide average has hovered slightly below $4 per gallon. Economists are worried that higher fuel costs will leave motorists with less money to spend on other discretionary goods. That would slow economic growth.
Consumers are also paying more for food. Grocery stores sales jumped 1.5 percent, according the retail sales data. That's triple the March increase and a reflection of higher prices.
But commodity prices have dropped in recent days, hinting that inflation pressures could cool in the coming months. Oil prices fell to near $96 a barrel Thursday on expectations that global demand will slow this year. That's down from nearly $114 a barrel last week. Corn prices fell sharply Wednesday and have been little changed on Thursday.
Paul Dales, an economist at Capital Economics, said higher energy and agricultural commodity prices could push the 12-month increase in the index to 8 percent in the coming months. But he said it would be a temporary spike.
"With commodity prices now falling, both producer and consumer price inflation are likely to drop sharply in the second half of the year," Dales said.
The retail sales data wasn't all bad. While April marked the smallest increase in nine months, the government did revise the previous two months to show stronger sales gains in March and February.
And the government report was at odds with sales data from 28 of the nation's biggest retail chains. According to a survey by the International Council of Shopping Centers, those retailers enjoyed strong sales last month and over the past two months saw sales rise 5.25 percent, compared to the same period a year ago. That's the strongest spring since 1999.
Many economists say brighter outlook for hiring should blunt the impact of inflation. Companies have added 250,000 jobs each month, on average, in the past three months, the biggest hiring spree in five years. The unemployment rate has dropped nearly a full percentage point in the past five months.
Americans are growing more optimistic about the U.S. economy, a sentiment that is benefiting President Barack Obama despite public disenchantment with his handling of rising gasoline prices and swollen government budget deficits.
An Associated Press-GfK poll shows that more than 2 out of 5 people believe the U.S. economy will get better, while a third think it will stay the same and nearly a fourth think it will get worse, a rebound from last month's more pessimistic attitude.
Still, the unemployment rate is 9 percent.
The number of people seeking unemployment benefits last week dropped by the most since February. But it comes after layoffs increased in three of the previous four weeks. The four-week average for unemployment applications, a less volatile measure, is nearly 12 percent higher than in early April.
That rise has raised concerns among some economists that hiring could slow this month. But others argue that if applications continue to fall, hiring should stay healthy.
Carl Riccadonna, an economist at Deutsche Bank, said "the labor market is picking up traction" and applications should fall below 400,000 in the next couple of weeks. That could translate into a job gain of as much 300,000 in May, Riccadonna said.
More jobs are critical to boosting consumer incomes and spending. Consumer spending accounts for about 70 percent of the economy
Sales at clothing stores posted a 0.3 percent rise. However, sales at general merchandise stores, a category that covers both department stores and big retailers such as Wal-Mart, edged up a modest 0.1 percent. And department store sales actually fell 0.2 percent.
Retailers are benefiting from a Social Security tax cut, which is putting more money in people's pockets. But economists worry that consumers may be forced to spend much of their tax savings to fill their tanks.
The overall economy grew at a 1.8 percent annual rate in the January-March quarter, weaker than the 3.1 percent growth in the previous quarter. But the upward revisions to February and March retail sales have many economists expecting the government's next estimate of first quarter growth will be closer to 2.3 percent.
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