Retail Sales Rise Sharply in October : Strongest Increase in 7 Months Sparks New Inflation Fears

Retail sales shot up 0.9% in October, the strongest increase in seven months, the government said today in a report that renewed financial markets’ concern about inflation.

Production at the nation’s factories, mines and utilities rose a moderate 0.4% in October after two months of smaller gains, the Federal Reserve Board said.

The sharp increase in business at retail stores was paced by strong gains among car dealers, department stores and clothing stores, the Commerce Department said. Retail sales had declined 0.3% in September.

Led by gains in business equipment, automotive product and construction supply production, the latest increase pushed the output of the nation’s industrial sector to 5.1% above its October, 1987, level, the Fed said.

Regaining Momentum

The two reports provided fresh evidence that the economy is regaining the momentum it lost in September when sales fell, industrial output and consumer spending were flat and the gross national product growth rate slowed, economists said.

“It indicates that the economy is still growing fairly rapidly and it indicates that it could lead to additional inflation,” said economist Michael Penzer of Bank of America.

“That’s exactly what the Fed does not want,” Penzer said.

Concern that the Federal Reserve will react to the economic rebound by raising interest rates to stem inflation caused a sell-off in the credit market after the reports were issued.

Skittish Markets

Financial markets have been particularly skittish since Election Day because of uncertainly over the economic policies of President-elect George Bush and his plans for tackling the federal budget deficit and the U.S. trade deficit.

But some analysts said underlying consumer demand may not have gained enough momentum to cause the Fed to tighten credit in the near future.

Economist Michael Tindall of Discount Corp. said that especially given the decline in retail sales in September, the central bank is probably not likely to immediately tighten credit. “The last three months taken together are not excessive. If we had a 0.9% growth month after month, however, that would be a different story.”

The White House issued a statement that the two economic reports showed no evidence of a rekindling of inflation. Spokesman Marlin Fitzwater said the reports “are both very positive and very encouraging for continued steady growth in the economy.”

Department store sales rose 2.3% last month, but some economists attributed that to the early introduction of Christmas displays. It is unclear whether the tactic will prompt consumers to spend more or spend earlier, they said.

Also rising by a sharp 1.7% were automobile sales, following a 2.2% September drop.