Consumer Prices Up a Modest 0.2% : Economy: Retail sales dip for second month. Slowdown is seen as easing pressure on the Fed to raise interest rates again.

In two more signs that the economy is growing at a more sustainable pace, the government said Tuesday that consumer prices rose a modest 0.2% in May and that retail sales dipped for the second month in a row.

Economists and Wall Street traders welcomed the news, saying the reports show that the economy is no longer in danger of overheating and that inflationary pressures continue to ease.

Bond yields fell sharply, triggering a stock market rally that pushed the Dow Jones industrial average above the 3,800 mark for the first time in nearly three months. The yield on the benchmark 30-year Treasury bond dropped to 7.30% from 7.35% on Monday. The Dow rose 31.71 points to end at 3,814.83, its highest close since March 24.

Analysts also said the positive inflation news should further ease pressure on the Federal Reserve Board to raise short-term interest rates again when its policy-making Federal Open Market Committee meets in early July.

The Fed has raised rates four times since February in an effort to prevent the economy from overheating and keep inflation under control.

“The economy is clearly slowing, so there’s really no reason why the Fed needs to raise interest rates again now,” said Michael Moran, chief economist at Daiwa Securities America in New York.

In its report showing a modest 0.2% rise in consumer prices in May from April, the Labor Department said lower energy costs and the biggest one-month drop in airline ticket prices in 25 years only partially offset higher prices for fruits and vegetables.

New car prices rose 0.3%, tobacco prices surged 1.3% and medical costs were up 0.4%.

Excluding the volatile categories of food and energy, the so-called core rate of inflation was up 0.3% in May. The core rate has risen only 2.8% over the past 12 months.

Despite the national rise in prices, consumers in metropolitan Los Angeles--which includes Orange, Riverside, San Bernardino and Ventura counties--saw prices fall 0.4% last month.

Southern California consumers benefited from lower prices for housing, transportation and other key components of the inflation index, said Sam Hirabayashi, the Labor Department’s chief statistician in the West.

The 0.2% dip in May retail sales reported by the Commerce Department was attributed to a sharp 1.9% drop in sales of new cars. The overall sales decline followed an even steeper 1.1% drop in April, marking the first time in a year that retail sales have fallen two months in a row.

Retail Sales Seasonally adjusted, in billions of dollars, 1993 and 1994 Source: Commerce Department