Strong auto demand buoys U.S. retail sales; producer prices rise

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. retail sales rose in December amid strong demand for automobiles and furniture, providing further evidence that the economy ended the fourth quarter with momentum and is poised for stronger growth this year.

The strengthening economy also is starting to generate higher inflation. Other data on Friday showed a second straight monthly increase in producer prices in December, which led to the biggest year-on-year gain in just over two years.

"The broader trend in the consumption data still looks solid," said Daniel Silver, an economist at JPMorgan in New York. "Consumer spending will also likely continue to benefit from the recent increase in confidence and wage gains."

The Commerce Department said retail sales increased 0.6 percent last month. November's retail sales were revised up to show a 0.2 percent rise instead of the previously reported 0.1 percent gain. Sales were up 4.1 percent from December 2015. They rose 3.3 percent for all of 2016, up from 2.3 percent in 2015.

Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.2 percent after being flat in November. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had forecast overall retail sales increasing 0.7 percent and core sales gaining 0.4 percent last month.

The retail sales report added to surveys on manufacturing and the services sector in suggesting the economy regained speed at the end of the fourth quarter after appearing to lose some ground in November.

Spending is likely to remain supported by lofty consumer sentiment levels.

The dollar rose against a basket of currencies after the data. Prices for U.S. Treasuries were lower, while U.S. stocks edged higher.

Rising wages due to a tightening labor market are expected to underpin consumer spending this year, providing a boost to the economy. Growth is also expected to get a lift from President-elect Donald Trump's pledge to cut taxes, increase infrastructure spending and relax regulations.

Average hourly earnings increased 2.9 percent in the 12 months through December, the largest gain since June 2009, the government reported last week.

"There is no reason to suspect that consumption growth is going to weaken in the first half of this year," said Paul Ashworth, chief U.S. economist at Capital Economics in New York. "Particularly not when households will be anticipating a potentially big decline in tax rates at some point this year."

Against the backdrop of a labor market that is at or near full employment, Trump's proposed fiscal stimulus could fan inflation and prompt the Federal Reserve to raise interest rates faster than is currently envisaged.

The Fed raised its benchmark overnight interest rate last month by 25 basis points to a range of 0.50 percent to 0.75 percent. The U.S. central bank has forecast three rate hikes for this year. The Atlanta Fed is forecasting GDP rising at a 2.9 percent annualized rate in the fourth quarter. The economy grew at a 3.5 percent pace in the third quarter.

INFLATION STIRRING

Even before the anticipated stimulus, inflation is perking up. In a separate report on Friday, the Labor Department said its producer price index for final demand increased 0.3 percent last month after advancing 0.4 percent in November.

That lifted the year-on-year increase in the PPI to 1.6 percent, the largest gain since September 2014. The PPI rose 1.3 percent in the 12 months through November. Producer prices increased 1.6 percent in 2016 after falling 1.1 percent in 2015.

Producer prices are rising as some of the drag from the plunge in oil prices fades. Oil prices have risen above $50 per barrel. But renewed dollar strength in the wake of Trump's election could temper some of oil's impact on inflation.

A 2.4 percent jump in auto sales accounted for much of the rise in retail sales last month. There was also a boost from a 2.0 percent rise in sales at service stations, reflecting higher gasoline prices.

Sales at building material stores increased 0.5 percent as did those at furniture shops. Receipts at clothing stores were unchanged despite a generally busy holiday season. Department store giants Macy's and Kohl's Corp last week reported drops in holiday sales.

Department stores have faced stiff competition from online rivals including Amazon.com. Sales at online retailers jumped 1.3 percent last month after gaining 0.3 percent in November. Sales at sporting goods and hobby stores rose 0.2 percent.

But Americans cut back on eating out, with receipts at restaurants and bars falling 0.8 percent last month.

(Reporting by Lucia Mutikani; Editing by Paul Simao)