WASHINGTON -- It's hard to find much fault with the U.S. economy these days.

The latest batch of statistics from the government on Friday showed that consumers are continuing to spend steadily; bolstering growth, while inflation remains moderate. There was also a report that the industrial sector took a breather in September, but analysts said all signs. point to continued strength in manufacturing.

In fact, things are looking so good that bond market expectations remain alive that Federal Reserve officials will continue their pre-emptive strike against inflation by raising short-term rates in November.

"The economy has lots of momentum, and the Fed needs to tighten a little bit more," said Dana Johnson, chief market analyst for First National Bank of Chicago.

The bond market took some comfort from the Labor Department report that the consumer price index in September rose only 0.2% with the help of falling energy prices. Compared with a year earlier, prices were up 3%, which Was also the case for core prices-excluding the volatile food and energy components.

September's CPI gain was smaller than the 0.3% increases in the preceding three months. It came a day after a surprising drop in the September producer price index that convinced market participants that Fed officials will not raise rates again until the Nov. 15 meeting of the Federal Open Market Committee.

Still, analysts who picked through the CPI figures said they saw evidence that inflation is creeping slightly higher. "By all indications, inflation has been accelerating modestly," said Brian Wesbury, chief economist for Griffin, Kubik, Stephens & Thompson Inc. in Chicago.

For the three months ending in September, consumer prices rose at an annual rate of 3.6% with the help of surging food and energy prices. Even a 3% rate of inflation is up from the 2.5% pace at the beginning of the year, said Stuart Hoffman, chief economist for PNC Bank Corp. in Pittsburgh.

"There's ample evidence that the rate of inflation is inching up," Hoffman said, "It's not alarming, and it's not galloping ahead, but it's going in the wrong direction."

While the latest numbers seemed to be soothing enough to remove any urgency for the Fed to tighten rates, Hoffman Said he still expects to see officials raise the federal funds rate to 5.25% from 4.75% at the Nov. 15 FOMC meeting. He also expects an increase in the discount rate to 4.5% from 4%.

Analysts said the economy still appears to be growing above the 2.5% pace preferred by Fed officials, and some believe growth will strengthen in the final three months of the year despite the upturn in interest rates. There are already signs that retailers are looking forward to strong Christmas sales, and automakers plan on increasing production in the fourth quarter to meet consumer demand for new cars and trucks.

The Commerce Department reported Friday that retail sales surged 0.6%, led by continued strength in autos and other durable goods. The increase was the fourth straight monthly advance and followed a revised gain of 1.1% in August sales, up from the 0.8% increase reported last month.

A separate report from the Fed said the level of industrial production in September was unchanged, breaking a 15-month string of advances. U.S. factories, mines, and utilities operated at 84.6% of capacity, down slightly from 84.8% in August.

Fed officials said the General Motors strike that disrupted supplies during the month contributed to the drop in industrial production. However, automakers are "ramping up production" in the final quarter of the year, Hoffman said. He also noted that output at mines and utilities was down three months in a row, a trend that is likely to be reversed.

"This week's reports on prices, industrial production, and retail sales confirm that the economy continues on a path of sound growth with modest inflation," said Laura D'Andrea Tyson, head of the president's Council of Economic Advisers.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.