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US inflation unexpectedly slowed in September even as retail sales picked up, keeping pressure on the Federal Reserve to act soon to lessen the risk of a downward price spiral.
Federal Reserve Chairman Ben Bernanke signaled on Friday the central bank would likely pump more money into the sagging economy, and investors expect the Fed will launch a new asset-buying spree as soon as next month.
The consumer price index rose 0.1% in September and the core index, which excludes volatile food and energy prices, remained unchanged for the second straight month, data released by the Labor Department showed.
Core prices were up just 0.8% in the 12 months through September, the smallest rise since 1961.
"If anything that may make (the Fed) more likely to embark on asset purchases, and that may mean they're going to be more aggressive with those asset purchases," said Richard Bryant, head of treasury trading at MF Global Securities in New York.
US Treasury prices fell and yields rose on views the Fed would try to create inflation. US stock indexes opened higher before turning mixed while the dollar hit its lowest in more than eight months against the euro.
Deflation risk
A prolonged drop in prices would likely lead consumers to put off purchases and businesses to cancel investments, compounding economic woes that are already weighing heavily on US President Barack Obama and his fellow Democrats ahead of congressional elections on November 2.
At a speech in Boston, Bernanke said high unemployment and low inflation point to a need for a further easing of US monetary policy, but he offered no details on the central bank's next step.
Investors expect the Fed could pump billions of dollars into the economy, in a second major round of "quantitative easing", to support the recovery.
"(This) gives the Fed room to do whatever it wants to do," said Jim Awad, managing director at Zephyr Management in New York.
At the same time, sales at US retailers rose by a stronger-than-expected 0.6% in September, lifted by sales of big-ticket items including autos, electronics and appliances, Commerce Department figures showed.
The reading suggested consumption may have been a bit stronger than economists had anticipated in the third quarter.
Meanwhile, manufacturing activity in New York State jumped in October, lifted by improvements in new orders and shipments, according to the New York Fed's "Empire State" business index.
"Retail sales and the Empire State index were strong, suggesting the economy is indeed improving. But inflation remains low and troubling," said Hugh Johnson, chief investment officer at Hugh Johnson Advisors in Albany, New York.
The US economy slowed sharply in the second quarter, weighed down by a hefty trade gap and dwindling fiscal stimulus.
Pressure on Obama
The weak economy has kept the pressure on the Democratic party, which looks likely to lose control of the US House of Representatives in November2 elections.
US consumer sentiment unexpectedly dipped in early October to its weakest level since July, with buying plans on the decline, a separate survey released on Friday showed.
The Thomson Reuters/University of Michigan's preliminary October reading on the overall index on consumer sentiment came in at 67.9, down from 68.2 in September and below the 69.0 median forecast among economists polled by Reuters.
The survey showed that consumers' assessments of government economic policies fell to the lowest level since Obama took office.
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