Wholesale prices, retail sales both rise in June

Higher energy prices rippled through the economy in June, helping drive bigger-than-expected gains in retail sales and inflation at the producer level.

The higher prices at the gas pump and for other energy products were seen as temporary, but economists worry that consumer spending will remain lackluster as unemployment rises, slowing a broader recovery.

The Commerce Department reported Tuesday that retail sales rose 0.6 percent in June, the biggest gain in five months. But without the gains from gasoline station sales and a rebound in autos, retail sales actually dipped 0.2 percent.

"Severe drags to consumer spending remain in place, but the economic gears are starting to turn market mechanics away from the vicious down-cycle," said Stuart Hoffman, chief economist at PNC.

Meanwhile, the 1.8 percent rise in wholesale prices - double what economists had expected - was the biggest gain since November 2007. It fanned investors' fears about inflation even though economists said the energy spike was not the beginning of a dangerous bout of inflation.

Over the past 12 months, wholesale prices have actually fallen 4.6 percent.

"A rogue surge in gasoline prices was behind the spike," said Brian Bethune, economist at IHS Global Insight. He predicted that the Labor Department's July report on wholesale prices would show prices moderating.

Crude oil prices topped $72 a barrel in June but have eased since then. Oil prices hit a record-high of $147 a barrel last July.

Many analysts expect the June increase in energy prices was short-lived and that the weak economy will restrain companies from ratcheting up prices they charge consumers.

Still, the unexpectedly big jump in wholesale prices did rattle bond investors. Prices, which move in the opposite direction of yields, plunged. The yield on Treasury's 10-year note rose to 3.44 percent in afternoon trading, up from 3.35 percent earlier in the day.

The 10-year note serves as a benchmark for many mortgage rates. Sustained increases would mean higher mortgage rates at a time when the housing sector is still struggling to rebound from a steep slump.

Better results from banking giant Goldman Sachs Group Inc. helped stocks post modest gains Tuesday. The Dow Jones industrial average added about 28 points to 8,359.49. Broader indexes also rose.

Stripping out volatile food and energy prices, all other prices rose a bigger-than-expected 0.5 percent in June, the most since October. Core prices dipped 0.1 percent in May.

For the 12 months ending in June, core prices rose 3.3 percent.

In June, energy prices jumped 6.6 percent led by an 18.5 percent rise in gas prices, the biggest increase since November 2007. Home heating oil and liquefied petroleum gas also posted their largest gains since November 2007.

Food prices posted a 1.1 percent gain in June, after falling 1.6 percent in May. A 21.8 percent jump in the price of vegetables led the way. Prices for eggs and young chickens also fed the increase as did a record 3.6 percent jump in the price of bottled carbonated soft drinks.

Higher prices for cars, trucks, furniture and pharmaceutical preparations factored into the pickup in "core prices" in June. Economists blamed higher energy costs for spilling over and helping to push up the prices of other goods. They believe this will reverse as energy prices moderate.

A third government report showed that businesses cut inventories for the ninth consecutive month, a drop of 1 percent in May, as companies continued to trim stockpiles amid the country's longest recession since World War II.

To battle the downturn, the Federal Reserve has slashed a key banking lending rate to a record low near zero. It is expected to hold the rate there through the rest of this year to help support the economy and because the central bank doesn't foresee inflation getting out of hand.

Fed Chairman Ben Bernanke and many private economists predict the recession will end later this year. However, they warn that the recovery will be slow. That means the unemployment rate, now at a 26-year high of 9.5 percent, will keep rising, probably hitting double-digits in the months ahead.

At the Fed's last meeting in late June, Fed policymakers acknowledged that energy and other commodity prices had risen. But they predicted that idle factories and the weak employment market would make it hard for companies to raise prices. The Fed said it expects inflation will "remain subdued for some time."