By Mark Felsenthal
WASHINGTON (Reuters) - Sales at U.S. retailers rose slightly less than expected in December, while underlying inflation remained tame, suggesting the recovery was strengthening modestly with little price pressure building.
Despite the small rise in retail sales in December, a key shopping month, sales for all of 2010 reversed two years of contraction with the biggest gain in more than a decade, according to data released on Friday.
"We are gathering momentum," said Swiss Re chief economist Kurt Karl, adding that a three-month moving average of retail sales was "really strong."
However, in an illustration of headwinds yet facing the recovery, another report showed that rising gasoline prices chilled consumer sentiment in January and raised inflation expectations.
Other data on Friday showed a surprisingly large gain of 0.8 percent in output at the nation's factories, mines and utilities in December, although cold weather was a factor. Business inventories grew much less than expected in November as sales kept up a strong pace.
Stock were up slightly, while Treasuries extended gains after the Thomson Reuters/University of Michigan preliminary data for January showed consumer sentiment rose less than expected.
The dollar extended losses against the yen and euro after the consumer sentiment report.
The reports are unlikely to budge the U.S. Federal Reserve from its $600 billion bond buying program aimed at accelerating growth and lowering the lofty jobless rate.
Retail sales climbed 0.6 percent, advancing for the sixth straight month as sales declines at electronics and general merchandise stores were offset by gains in gasoline and building materials sales, the Commerce Department said.
Analysts had expected sales to rise 0.8 percent.
Excluding autos, sales rose 0.5 percent. Analysts had forecast a 0.7 percent increase.
Brian Jones, senior economist at Societe Generale in New York, called the retail sales report "mildly disappointing."
"There is some evidence that the year-end winter storm may have impacted some areas and held down the headline figure," he said.
For the year as a whole, sales increased 6.6 percent after a 6.5 percent drop in 2009. It was the largest 12-month gain in sales since 1999.
COMMODITY PRICE PRESSURE
While softer-than-expected, the trend in sales points to a strengthening in demand in the fourth quarter. Fed Chairman Ben Bernanke said on Thursday the economy was "moving in the right direction" with the risk of a troubling deflation falling.
A strengthening of global demand, largely in fast-growing emerging economies, has given a lift to commodity prices and has also led to a quickening in U.S. overall inflation.
In December, sharply higher prices at the gasoline pump pushed consumer prices up at their fastest pace in a year and a half, though core prices, which strip out volatile food and gas costs, barely budged, a Labor Department report showed.
The consumer price index rose a slightly more-than-expected 0.5 percent, but the core CPI rose just 0.1 percent, in line with expectations.
"We don't see right now inflation to be a major threat to the economy," said David Resler, chief economist at Nomura Securities in New York.
Overall consumer prices rose 1.5 percent from the same month a year ago, while core consumer prices gained 0.8 percent in 2010, the slowest calendar year pace since the department started keeping records in 1958.
However, higher gasoline prices weighed on consumers and pushed inflation expectations to their highest in more than three years, according to the Thomson Reuters/University of Michigan survey. That development could trouble Fed policymakers, who lay great emphasis on expectations as a harbinger of future inflation.
A separate report from the central bank showed U.S. industrial production rose by a stronger-than-expected 0.8 percent in December. That reflected a surge of 4.3 percent in utility output, which the Fed pinned on unusually cold weather.
Manufacturing and mining production both gained 0.4 percent, and industrial output for the fourth quarter as a whole advanced at a 2.4 percent annual rate, slower than in previous quarters of the year.
The steady advance in manufacturing, which has led the recovery, helped push up the amount of industrial capacity being put to use in December to 76 percent.
That's the highest since July 2008, but still 4.6 percentage points below the long-run average, suggesting there is still ample capacity to spare before price pressures might emerge.
(Additional reporting by Corbett B. Daly and David Lawder in Washington, and Richard Leong and Karen Bretell in New York; Editing by Neil Stempleman and Andrea Ricci)
