Important signs emerged Friday that the nation's economy remains robust-and that inflation is not dead.
Retail sales were strong in August and stronger in July than earlier believed. Meanwhile, the producer price index for August edged up 0.3%, breaking a string of seven months of deflation at the wholesale level.
"It's a wake-up call. We've learned again that prices can go up," said Kenneth Mayland, chief economist at KeyCorp, Cleveland, Ohio.
He and some other economists think chances have increased that the Federal Reserve will raise interest rates again this year-but probably not at the central bank's monetary policy session Sept. 30.
"It's still less than even money for the next meeting, but if things continue this way, particularly with good jobs reports, the odds are quite high the Fed will do something in November," said Nicholas S. Perna, chief economist at Fleet Financial Group, Boston.
"The Fed couldn't tighten credit with the PPI declining, and I don't think Friday's data is enough evidence to do so, but another couple of readings along these lines will make the case," said Mr. Mayland.
Retail sales increased 0.4% in August, rising for the third month in a row, according to the Commerce Department.
Last month's growth followed a revised rise of 0.9% in July. The July performance earlier had been estimated as a 0.6% increase. June retail sales rose 0.7%
Financial markets rose in the immediate wake of the new data, but Mr. Perna dismissed this as "a relief rally that the news wasn't worse." Mr. Mayland noted that the markets had moved lower most of the week and thus were braced for the reports.
Other economists offered a more benign view.
"I'm not rooting for deflation. I would have been disturbed if the PPI had declined again rather than risen a bit," said Edward Yardeni, chief economist at Deutsche Morgan Grenfell Inc.
As for consumer spending, "it zigs and zags from quarter to quarter, but consumer sentiment remains high. I think it will probably stay in strong territory, barring something like a stock market crash," he said.
"Fears of an overheated economy are greatly exaggerated," said Bruce Steinberg, chief economist at Merrill Lynch & Co., New York.
The producer price rise last month was mostly the result of a "temporary pop in energy prices," he said. He noted that the index is still down 0.2% from a year ago, meaning the United States is still experiencing "deflation at the wholesale level."
Nor was Mr. Steinberg worried about retail sales, saying the latest chain store data suggest a September slowdown and that strong auto sales probably have been "borrowed from the future."
"Consumer fundamentals are healthy but not that healthy, and we believe there will be a payback in the fourth quarter," he said. Meanwhile, "we don't see any incipient pressure in the inflation pipeline."
But Mr. Perna asserted that Fed action on interest rates cannot be ruled out, even without an uptick in inflation soon.
He cited Fed Chairman Alan Greenspan's summer congressional testimony as support.
"Greenspan underscored that it is demand and not just inflation that the Fed is watching," he said. "If demand grows faster than supply, there is no 'new era' view of the world that makes that comfortable" for the Fed.
"What has happened over the past year, second quarter to second quarter, is that the economy has grown 2.5% while the unemployment rate has fallen over half a point," he said. "That is an unambiguous, nontheoretical picture of demand outstripping supply."
The Fed's Open Market Committee meets about every six weeks to assess business conditions. Beyond its session Sept. 30, the committee is scheduled to meet Nov. 12. The Fed can act on rates between meetings, of course but has rarely done so in the Greenspan era.
Mr. Perna said he thinks "we have seen the lows on inflation" and noted several other concerns the Fed may have about price levels.
"What if the dollar starts falling again?" he asked. Recently the dollar exchange rate has eased against other currencies after a long rise in value. Many forecasters think it will keep rising in value, but others are more circumspect.
"A declining dollar exchange rate would reverse a lot of the nice things we've enjoyed over the past two years," he said. "The higher dollar dropped import prices and made our financial assets more attractive."
At the same time, the impact of the unfolding economic problems in Southeast Asia is unknown. Thailand, Malaysia, Indonesia, the Philippines, and Hong Kong have experienced falling stock prices, capital outflow, and depreciating currencies.