By Lucia Mutikani
WASHINGTON (Reuters) - U.S. retail sales rose more than expected in June as Americans bought motor vehicles and a variety of other goods, bolstering views that economic growth picked up in the second quarter.
Those expectations were further reinforced by other data on Friday showing that industrial production recorded its biggest increase in 11 months in June, driven by a surge in motor vehicle assembly. With domestic demand strengthening, inflation is also steadily rising.
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The bullish data and a rally on Wall Street could allow the Federal Reserve to raise interest rates later this year, but much will depend on policymakers' assessment of the impact on the U.S. economy of Britain's June 23 vote to leave the European Union.
"In normal times, this would be enough for the Fed to continue raising interest rates," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "But Fed officials want to wait and see if and how Brexit affects the outlook for the U.S. economy before pulling the trigger again."
The Commerce Department said retail sales rose 0.6 percent last month after gaining 0.2 percent in May. It was the third straight month of increases and lifted sales 2.7 percent from a year ago.
Excluding automobiles, gasoline, building materials and food services, retail sales shot up 0.5 percent after a similar gain in May. These so-called core retail sales correspond most closely with the consumer spending component in the gross domestic product report.
Economists had forecast overall retail sales rising only 0.1 percent and core sales gaining 0.3 percent last month.
The better-than-expected rise in core retail sales last month suggested consumer spending increased by at least a 4.5 percent annualized rate in the second quarter, which would be the fastest since 2006, according to economists.
"While this sort of growth will be hard to emulate in the third quarter, most of the positive fundamentals supporting the consumer remain in place, particularly the healthy state of the labor market," said Michael Feroli, an economist at JPMorgan in New York.
The Atlanta Fed raised its second-quarter GDP growth estimate by one-tenth of a percentage point to a 2.4 percent rate. The economy grew at a 1.1 percent pace in the January-March quarter.
In a separate report, the Fed said industrial output increased 0.6 percent last month, reversing May's 0.3 percent drop. Manufacturing output rose 0.4 percent amid broad increases in production, including a 5.9 percent surge in auto assembly.
Warm weather spurred utilities output, also another boost to second-quarter consumer spending.
Mining production gained for a second straight month as an increase in coal output and a rise in oil well drilling and servicing more than offset declines in oil and gas extraction and non-metallic mineral mining.
Friday's reports helped to offset disappointing financial results from big U.S. banks, hoisting Wall Street to fresh highs. The dollar rose versus a basket of currencies, while prices for U.S. government debt fell.
The strong domestic demand is gradually translating to higher consumer prices. In a third report, the Labor Department said its Consumer Price Index rose 0.2 percent last month after a similar gain in May. The so-called core CPI, which strips out food and energy costs, also rose 0.2 percent in June, increasing by the same margin for three consecutive months.
That raised the year-on-year core CPI gain to 2.3 percent from 2.2 percent in May. This increase is higher than the average annual rate of 1.9 percent over the past 10 years.
The Federal Reserve has a 2 percent inflation target and tracks an inflation measure which is currently at 1.6 percent.
"Looking ahead to the second half, further stability in commodity prices and fading import price deflation should continue to show up in the form of firmer prices for consumer goods," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
Concerns about persistently low inflation contributed to the U.S. central bank keeping interest rates unchanged last month. The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.
A fourth report showed consumer sentiment fell in early July as high-income households worried about the impact of Brexit on stock prices. Share prices have, however, since rebounded and are trading at record highs.
This, together with rising wages and higher savings should keep consumer spending supported this year. Retail sales in June were buoyed by purchases of building materials and garden equipment, which jumped 3.9 percent, the largest increase since April 2010.
Online retail sales rose 1.1 percent, while receipts at sporting goods and hobby stores shot up 0.8 percent. There were also boosts from furniture and auto sales, as well a purchases of grooming products. But Americans cut back on apparel purchases and spending at restaurants and bars.
(Reporting Lucia Mutikani; Additional reporting by David Lawder; Editing by Andrea Ricci)