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Wholesale inflation plunges

Retail sales drop for second month

WASHINGTON -- Inflation at the wholesale level plunged at a record pace in October, led by big declines for gasoline and new cars, while retail sales slid for a second straight month.

Wholesale prices fell 1.6 percent in October, tying the record decline set in October 2001, the Labor Department reported yesterday. Underlying inflation, excluding energy and food, was also well-behaved, falling by 0.9 percent, the biggest retreat in 13 years.

Meanwhile, retail sales dropped by 0.2 percent in October following an even-bigger 0.8 percent fall in September.

But much of the weakness in both months came from the big drop in energy prices, which depressed the dollar level of sales at gasoline stations.

Excluding the drop at gasoline stations, retail sales actually rose by 0.4 percent last month, as strength in auto sales offset weakness at department stores and hardware stores.

Analysts said they believed the strength in employment, with the jobless rate at a five-year low of 4.4 percent, meant that consumer spending in the all-important holiday season would be supported by income growth and the fall in gasoline prices, which will give Americans more to spend on other items.

"The underlying trend in consumer spending still looks pretty healthy," said Bill Cheney, chief economist at John Hancock Financial Services.

Consumer spending, which accounts for two-thirds of economic growth, slowed sharply in the spring as consumers were battered by soaring energy prices, rising interest rates, and a cooling housing market.

The overall economy grew at anemic rates of 2.6 percent in the spring and an even weaker 1.6 percent in the summer. But analysts said there should be a modest rebound in growth in the final three months of this year as falling gasoline prices give consumers a second wind.

For October, sales at auto dealers rose by 0.6 percent after a 0.7 percent September increase.

But sales at department stores fell by 0.3 percent, while sales at specialty clothing stores managed only a tiny 0.1 percent increase.

The big retreat in core prices at the wholesale level was certain to be welcomed at the Federal Reserve, where policymakers are hoping that a string of 17 consecutive rate hikes will slow the economy enough to cause a decline in inflation pressures, which had risen above the Fed's comfort zone.

The central bank has left rates alone since August and analysts believe there will be no change when the Fed meets for the last time this year on Dec. 12.

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