July 15 (Bloomberg) -- The economic boost from U.S. tax rebates began to fade in June and inflation pressures increased, reports today showed, pointing to a possible contraction later this year.

Retail sales rose 0.1 percent from the previous month, the Commerce Department said today in Washington. That was less than economists forecast. At the same time, the Labor Department reported that producer prices jumped 1.8 percent, the most since November. From a year ago, prices climbed 9.2 percent, a surge unseen since 1981.

``The momentum faded at the end of the quarter,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``Consumer spending will be weaker in coming months.''

The figures increased concern that falling home values, rising unemployment and tighter credit will cause consumers to retrench even more. Traders pared bets that the Federal Reserve will increase interest rates by the end of the year.

Fed Chairman Ben S. Bernanke today abandoned the message of the central bank's June policy statement that downside risks to growth had ``diminished somewhat,'' while maintaining its warning on inflation. Bernanke's shift reflects renewed turmoil in markets that forced the Treasury and Fed to mount a rescue of Fannie Mae and Freddie Mac this week.

There are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified,'' he said in testimony to the Senate Banking Committee in Washington.

Dollar Declines

The dollar weakened the most against the yen since the March collapse of Bear Stearns Cos. after Bernanke's remarks, while Treasuries rose, pushing the yield on the 10-year Treasury down 2 basis points to 3.83 percent at 4:17 p.m. from 3.85 percent yesterday.

The Standard & Poor's 500 Index dropped 1.1 percent to close at 1,214.91, its lowest level since 2005.

Retail sales were projected to rise 0.4 percent after an originally reported 1 percent gain the prior month, according to the median estimate in a Bloomberg News survey of 81 economists.

Sales excluding automobiles increased 0.8 percent. They were forecast to increase 1 percent from the prior month, according to the survey median.

Americans bought fewer cars, furniture, electronics and building materials as gasoline prices soared. Today's report showed sales at automobile dealerships and parts stores dropped 3.3 percent, the most since February 2006.

Energy Costs

Energy prices also pushed producer expenses higher. Excluding food and energy, the increase was 3 percent from a year earlier, the same as the prior month. Food was 1.5 percent more costly, after a 0.8 percent change the previous month. Vegetables jumped 14.7 percent.

``It was primarily confined to the energy sector,'' said Lindsey Piegza, an analyst at FTN Financial in New York, which correctly forecast the rise in the core rate. ``There is risk that in the future they could seep through and cause an inflationary spiral, but right now inflation is going to take a back seat to the slowing economy'' on the list of Fed concerns.

The retail numbers are consistent with industry figures which signaled Americans are shunning big-ticket purchases. Cars and light trucks sold in June at a 13.6 million annual pace, the weakest since 1993, according to data issued earlier this month.

Sales of furniture fell 1.4 percent and purchases of electronics dropped 0.6 percent. Both were the biggest declines so far this year.

Pump Prices

A surge in receipts at service stations as gasoline prices rose to a record prevented total sales from falling. Filling station purchases jumped 4.6 percent last month, the most since November. Excluding gas, retail sales declined 0.5 percent, the biggest drop this year.

Regular unleaded fuel prices topped $4 a gallon for the first time in June and have continued climbing this month, according to AAA.

The jump in fuel prices may have also caused Americans to limit visits to restaurants. Sales at food services and bars fell 0.2 percent.

Retailers that gained sales last month included grocery, health care, clothing and sporting goods stores.

Influence on GDP

Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product figures for consumer spending, sales rose 0.3 percent, after a 0.7 percent increase in May. The government uses data from other sources to calculate the contribution from the three categories excluded.

Rising energy costs erode households' purchasing power and add to the risk that companies will try to raise prices, triggering a broader pickup in inflation.

The twin concerns may prompt Fed policy makers to keep interest rates unchanged this year, a Bloomberg survey last week showed. Economic growth will slow to a 0.5 percent annual rate in the fourth quarter, the weakest pace in six years, and consumer spending will post the smallest gain since 1991, according to the economists surveyed.

The government distributed $86.1 billion in stimulus checks through July 4, out of a total plan of about $110 billion. Rebate-linked promotions boosted sales at retail stores open at least a year to a better-than-forecast 4.3 percent gain in June, according to the International Council of Shopping Centers.

Store Sales

The industry figures for same-store sales account for about 17 percent of total retail purchases, which make up almost half of consumer spending. Consumer spending itself accounts for more than two-thirds of the economy.

Wal-Mart's same-store sales jumped 5.8 percent, the most in four years. The Bentonville, Arkansas-based company's U.S. discount stores and its Sam's Club membership warehouses drew additional customers who spent more on average per visit than in prior months.

``We continue to see a shift in the overall mix toward fuel, food and consumables, as our members manage through the current environment,'' Doug McMillon, Sam's Club president and chief executive officer, said in a statement on July 10.

To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Last Updated: July 15, 2008 16:36 EDT