Bloomberg News

WASHINGTON - U.S. producer prices fell unexpectedly and retail sales cooled in August - signs the economy, in a record 10th year of expansion, is growing at a pace that isn't likely to spark an inflation pickup.

"It's just about a picture-perfect economy - impressive economic growth with very little inflationary pressures," said Richard Yamarone, a senior economist at Argus Research Corp. in New York.

Prices paid to producers fell 0.2% last month, in the first drop since May, the Labor Department said. That fall reflected declines in the cost of clothing, computers, cars and gasoline.

Retail sales rose 0.2% in August, a fourth of the 0.9% increase in July, the Commerce Department said. Sales were 7% higher than a year earlier, the smallest year-over-year increase since December 1998. Even so, the pace of sales was a percentage point higher than the average gain for the expansion, which began in April 1991.

Energy costs are expected to push September prices higher; crude oil rose to a 10-year high of $35 a barrel this week. Still, with few signs of accelerating inflation outside of rising petroleum prices and slower consumer spending than in the past two years, Federal Reserve policymakers are likely to hold interest rates steady for the remainder of the year.

"I think we've come to a greater balance," said Robert McTeer, president of the Dallas Fed, in a speech last month.

A separate report from the Labor Department showed the number of workers filing for state unemployment benefits rose last week to 324,000. That was the highest number in 20 months and suggests that slower growth is leading to more layoffs.

The core rate of the producer price index, which excludes energy and food, rose 0.1% last month, the same as in July. The cost of cigarettes climbed; without the increase in tobacco prices, the core rate would have been unchanged, the Labor Department said.

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