US inflation fears rise

Inflation worries heightened in the US yesterday despite further evidence from retail prices that the economy is beginning to slow, writes Diane Coyle.

Retail sales slipped by 0.4 per cent in April, although the figure for March was revised up sharply. Car sales suffered their sharpest decline in two years. There were falls in sales of other consumer durables, building materials and clothing. "It confirms the downward trend in sales," Mark Cliffe at HSBC Markets said.

Many analysts thought there was still hope of a "soft landing" but warned that the Federal Reserve would be alert to April's jump in factory gate prices. Prices charged at the factory gate by manufacturers rose by a bigger-than-expected 0.5 per cent in April, the biggest increase in five months. Gasoline prices soared 7.7 per cent in the month and the core increase, excluding food and energy, was a more modest 0.3 per cent.

There were unnerving rises in some materials prices paid by producers. Overall, they rose by 2.1 per cent in April after a 1.3 per cent decline in March. It was the biggest increase for 18 months, but mainly due to higher oil prices.

Most analysts concluded that the inflationary danger was not yet widespread. The continuing weakness of labour costs also means higher materials prices are unlikely to be fully passed on.

Carol Stone, an economist at Nomura Securities in New York, said the price figures were not bad enough to push the Federal Reserve into raising interest rates when its policy committee meets on 23 May.

Laura Tyson, President Clinton's economic adviser, said the administration did not see a recession around the corner, although there was evidence the economy was slowing. She pointed out that consumer confidence was at its highest for five years.