WASHINGTON (Reuters) - U.S. producer prices excluding energy and food rose faster than expected last month and high gasoline prices boosted otherwise tepid retail sales, the government said on Tuesday in reports that signal inflationary pressures.

U.S. producer prices rose just 0.2 percent last month as food costs fell, but prices outside of food and energy rose a steeper-than-expected 0.3 percent. Retail sales in May rose just 0.1 percent, matching Wall Street expectations, with declines in auto, furniture and building material sales.

Analysts said the rise in core producer prices shows the risk that rising prices may be working their way from producers to consumers.

"Pipeline inflation pressures continue to build, and that impression was not dispelled by today's release," said William O'Donnell, head of U.S. interest rate strategy and research at UBS in Stamford, Connecticut.

The dollar climbed to its highest levels in over a month against the euro and the yen as the higher-than-expected core producer price reading heightened expectations the Federal Reserve would raise interest rates in June.

U.S. Treasury debt prices pared gains, while stocks were little changed in volatile trading.

The producer price report "supports the idea that (the Federal Reserve) will raise rates another 25 basis points on June 29, and the dollar has reacted positively to that," said Alex Beuzelin, foreign exchange market analyst at Ruesch International in Washington.

The consumer price report for May will be released on Wednesday, providing a much broader outlook on inflationary pressures. Analysts expect the 0.4 percent rise in the CPI, while the core rate is expected to rise on 0.2 percent.

FOOD COSTS FELL

Despite the stiffer-than-expected monthly rise in producer prices outside of food and energy, the 12-month gain held steady at the 1.5 percent increase seen in April, which could help temper inflation concerns.

Energy costs rose 0.4 percent in May, a much slower pace of advance than in March or April, when they rose 1.8 percent and 4 percent, respectively.

Residential natural gas prices slid 3.1 percent, the fourth straight monthly decline. The drop helped offset a 2.2 percent gain in gasoline prices, a 5.1 percent jump in the cost of liquefied petroleum gas and a 2.6 percent increase in home heating oil.

Food costs fell 0.5 percent, helping to restrain the advance in overall producer prices.

The report showed prices for capital goods rose more quickly than for nonfood, non-energy consumer goods. Capital equipment prices were up 0.3 percent last month, while core consumer goods prices rose just 0.2 percent.

Pharmaceutical prices shot up 1.9 percent, the cost of heavy trucks rose 1.4 percent and communication equipment costs advanced 0.4 percent. Car prices, however, dropped 0.4 percent.

Intermediate goods prices rose 1.1 percent, both overall and excluding food and energy, while crude goods prices rose 2 percent. Core crude goods prices climbed 6.2 percent.

RETAIL SALES ROSE

In a separate report, the Commerce Department said sales at U.S. retail stores rose 0.1 percent in May, as expected, as strong gasoline sales outweighed declines in car, furniture and building material sales.

Sales at gasoline stations climbed 1.9 percent, following an upwardly revised 5.5 percent rise in April, as higher energy prices inflated prices at the pump. When gas sales were stripped from the number, sales fell 0.1 percent.

Retail sales at gas stations were up 21.9 percent from May 2005.

Meanwhile motor vehicle and parts sales fell 1.6 percent, the largest drop since February. Excluding cars and parts, retail sales rose 0.5 percent, in line with expectations.

When cars, parts, and gas were excluded, retail sales rose 0.3 percent.

Furniture and home furnishing store sales dipped 0.5 percent but were up 7.4 percent from a year earlier. Sales at building materials and garden equipment stores fell 0.4 percent but were up 11.2 percent from May 2005.

Consumer spending accounts for two-thirds of U.S. economic activity and analysts worry that higher energy prices, which act like a tax on households, are hitting consumption.

A separate Commerce Department report showed U.S. business inventories rose a smaller-than-expected 0.4 percent in April, tempered by a drop in the stocks of total retail trade and motor vehicles and parts.

Rising inventories can either be a signal of business confidence in future demand, or the result of an unexpected decline in sales, causing involuntary stock building.

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By Mark Felsenthal

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