Tepid Sales, Modest Inflation Add to Slowdown Evidence : Economy: Consumer prices up 0.3% in May. Analysts say data could prompt Fed to lower interest rates this summer.

Sluggish retail sales and a modest rise in inflation last month provide fresh evidence of an economic slowdown that analysts say could lead the Federal Reserve Board to lower interest rates this summer.

Consumer costs increased 0.3% in May, led by the biggest jump in gasoline prices in nine months. Excluding the volatile food and energy components, the core rate of the consumer price index edged up 0.2%, the Labor Department said Tuesday.

The Commerce Department reported that retail sales, after slipping 0.3% in April, were up a mere 0.2% last month.

“It’s an economy that’s struggling to retain its strength, not an economy that’s struggling to restrain inflation,” said economist Robert Dederick of Northern Trust Co. in Chicago.

The Fed “should act as soon as possible, like today, to arrest the downward momentum,” said Sung Won Sohn of Norwest Corp. in Minneapolis. “I’m afraid if they wait too long, the downward momentum will be too strong to reverse.”

Some analysts said the evidence to support an interest rate cut is inconclusive and that the case for easing credit is clouded by hints of political pressure from the Clinton Administration.

The Fed’s “basic view is that the economy is going to re-accelerate later this year,” said Eugene Sherman of investment firm M.A. Schapiro & Co. “But it is willing to read the data objectively.”

He said a string of reports showing rising unemployment and falling factory production could prompt the central bank to abandon its wait-and-see approach. The economy shed 101,000 jobs in May, the biggest loss since the nation was pulling out of the last recession four years ago.

Fed policy-makers next meet July 5-6 to review the economy and decide whether to adjust interest rates. Rates have held steady since Feb. 1, when the central bank completed a series of seven increases aimed at stifling inflation and restraining growth.

White House Chief of Staff Leon E. Panetta has said that a rate cut could give the economy a needed boost. But Treasury Secretary Robert E. Rubin denied that the Administration is trying to influence the Fed.

Some analysts said the Administration may be looking for a scapegoat in case a recession occurs before next year’s presidential election.

“It doesn’t harm politicians to use the Fed as a whipping boy,” Sherman said. “The risk is that the financial markets will start to take it seriously.”

Rubin said Tuesday that he still expects the economy to expand at a desirable pace with low inflation.

“The most probable outcome is that we will get back to a soft landing, with solid growth and moderate inflation after a period of softness,” he said at a White House briefing.

The consumer price report shows that inflation pressures weakened since April, when the index rose 0.4% as food prices spiked. The Labor Department reported last week that wholesale prices were unchanged in May for the second time in three months.

The CPI is up 3.6% at an annual rate for the first five months this year, compared to 2.7% in both 1993 and 1994.

Food prices rose a scant 0.1% in May after jumping 0.7% in April. Vegetable prices fell 4% after soaring 13.6% a month earlier.

Led by a 2.1% increase in gasoline, energy costs climbed 0.5% last month.

The slight increase in retail sales caught analysts by surprise. Most had expected a gain of about 0.8%.

A 0.5% rise in interest-rate-sensitive car sales last month--on the heels of a 1.4% drop in April--was much less than anticipated.