Retail Sales Drop 0.1% but Beat Forecasts

Retail sales performed far better than expected in October as consumers took encouragement from falling gasoline prices.

In other good economic news, core prices at the wholesale level -- excluding food and energy costs -- dropped by 0.3% last month, the biggest decline in two years. That offered reassurance that the big run-up in energy prices has yet to spill over into more widespread inflation.

The Commerce Department reported Tuesday that retail sales dipped 0.1% in October. The weakness, however, was concentrated in a 3.6% decline in auto sales as the boost from summer sales incentives waned and consumers shunned gas-guzzling sport utility vehicles.

Excluding autos, retail sales rose by 0.9% last month, triple the pace economists had expected, with department stores and specialty clothing stores enjoying a strong rebound.

Sales at specialty clothing stores were up a sharp 3.1% in October, while department stores posted a solid 1.5% increase in revenue. Both of these areas had suffered sales declines in September.

Analysts said a retreat in gasoline prices last month apparently encouraged consumers to resume spending.

“This suggests that the economy has largely shrugged off the ill effects of the hurricanes,” said Mark Zandi, chief economist at Economy.com. “Christmas will turn out better than expected.”

Before the retail sales report, economists had worried that the higher energy costs could trigger cutbacks in other areas of retail sales, a worrisome prospect given that consumer spending accounts for two-thirds of total economic activity.

Consumer confidence had fallen sharply in September and October under the weight of a surge in energy prices that saw the nationwide average for gasoline briefly rise above $3 a gallon, reflecting widespread shutdowns of Gulf Coast oil refineries after Hurricane Katrina struck in late August.

On the inflation front, the Labor Department reported Tuesday that wholesale prices rose by 0.7% in October after a 1.9% increase in September.

Excluding food and energy costs, so-called core inflation fell by 0.3% in October, the biggest one-month decline in two years.

That was seen as good news that the energy surge was not spilling over into more widespread price pressures.

More inflation data will be released today when the government reports on how consumer prices behaved in October. If core consumer inflation also remained relatively stable in October, analysts said it should go a long way to ease fears in financial markets that inflationary pressures were accelerating.