Sales rose 0.4 percent, up from a flat reading in September, the Commerce Department said Wednesday. Overall sales were slightly held back by a steep drop in gasoline prices. Excluding sales at gas stations, retail spending rose an even stronger 0.5 percent.
Core sales, a category that excludes volatile spending on autos, building supplies and gas, also rose 0.5 percent, up from a 0.3 percent gain in September.
The retail sales gain indicates that consumers stepped up spending at the start of the October-December quarter. Their spending accounts for 70 percent of economic activity.
Economists were encouraged by the solid October gain.
"This release provides yet more evidence that, despite the shutdown, the economy is gaining momentum," said Paul Dales, senior U.S. economist at Capital Economics.
Dales said a strong start to the October-December quarter could mean that consumer spending will grow at an annual rate of 2 percent to 2.5 percent this quarter. That would mark a sharp improvement from the 1.5 percent annual growth in consumer spending in the July-September quarter.
Economists say they think cheaper gas will help boost sales during the crucial holiday shopping season. Gas prices have fallen sharply since Labor Day and now are around $3.21, the lowest level in nearly two years.
A sharp drop in auto sales caused largely by a calendar quirk had dampened retail sales in September. Labor Day weekend auto sales were counted in August. But in October, auto sales 1.3 percent, reversing September's 1.2 percent decline.
In October, sales at department stores rose 0.5 percent after having fallen 0.6 percent in September. There were also solid sales gains at furniture stores, electronics and appliance stores and specialty clothing stores.
In addition to the drop at gas stations, sales at building supply stores fell 1.9 percent in October.
Growth in consumer spending slowed from July through September and economists have been concerned that spending may remain lackluster given weak income growth and the lingering impact of higher federal taxes at the start of the year.
Unemployment remains still high at 7.3 percent, and those Americans who have jobs are not seeing much in the way of pay increases. That's contributed to their more cautious mood.
But in one encouraging sign, hiring has picked up in recent months. The economy created 204,000 jobs last month, many more than expected. Employers have added an average of 202,000 jobs per month from August through October. That's up sharply from an average of 146,000 in May through July.
The overall economy grew at an annual rate of 2.8 percent in the July-September quarter, faster than expected, and up from 2.5 percent growth in the April-June quarter. But much of the growth came from an increase in business stockpiling. Without a corresponding increase in spending, many economists think companies will cut back on restocking in the October-December quarter, which would slow economic growth.
Most analysts have said they think the economy is growing at a weak annual rate below 2 percent in the current quarter. But some say the solid October retail sales may cause them to boost their estimates for the fourth quarter. Dales said he thinks the economy will grow at an annual rate between 2 percent and 2.5 percent this quarter.
CONSUMER PRICES
Cheaper gasoline lowered overall U.S. consumer prices slightly in October. But outside the steep drop at the pump, inflation stayed mild.
The consumer price index fell 0.1 percent last month, down from a 0.2 percent increase in September, the Labor Department said Wednesday. The October decline was due mainly to a 2.9 percent drop in gasoline costs, the largest since April. Over the past 12 months, overall prices have risen 1 percent, well below the Federal Reserve's inflation target of 2 percent.
PNC Bank chief economist Stuart Hoffman said the low inflation reading ensures that the Fed will continue its extraordinary measures to spur growth.
"From the Federal Reserve's perspective, inflation is too low, one reason why the central bank continues to provide massive stimulus to the economy," Hoffman said in a note to clients.
Excluding volatile energy and food costs, so-called core prices rose 0.1 percent in October from September and have risen just 1.7 percent over the past 12 months. The prices for new vehicles, clothing and medical care declined last month. But airfares rose a whopping 3.6 percent.
U.S. gasoline prices began falling in the spring and reached two-year lows earlier this month. The average price of a gallon of gas was $3.21, according to AAA's Daily Fuel Gauge Report.
The drop in fuel prices may be offset somewhat by slight increases in the cost of food, which rose 0.1 percent. That increase was driven by a 0.6 percent rise in the prices of meats, poultry, fish and eggs, the largest advance for any of the food categories.
Inflation has been modest over the past four years, with prices held down by the weak recovery from the Great Recession. High unemployment and modest wage hikes have made it difficult for Americans to spend more and retailers to charge more.
Low inflation gives the Fed more latitude to pursue its extraordinary stimulus to help drive economic growth. The Fed has been buying $85 billion a month in bonds to keep long-term interest rates low and encourage more borrowing and spending. It has also kept its key short-term interest rate near zero since late 2008.
Critics of the bond-buying program fear it will spark higher inflation in the future.
But a number of Fed officials have objected to slowing the program because inflation remains below 2 percent.
A small amount of inflation can be good for the economy, because it encourages consumers and businesses to spend and invest before prices rise further.
The Fed will release on Wednesday the minutes of its policymaker meeting that ended on Oct. 30. Economists expect the minutes to provide little insight into what steps the central bank will take next in terms of its bond buying and plans to keep the short-term interest rate it controls at nearly zero.
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