WASHINGTON (Reuters) - U.S. retail sales rose in July, pointing to an acceleration in consumer spending that could bolster the case at the U.S. Federal Reserve for winding down a major economic stimulus program.
Other data released on Tuesday showed that small businesses were more optimistic in July, although companies rebuilt inventories in June at an unexpectedly weaker pace.
Retail sales rose 0.2 percent in July, the Commerce Department said.
While the reading fell short of analysts' expectations, a closely-watched category of sales that strips out cars, gasoline and building materials posted its largest gain in seven months, rising 0.5 percent.
These "core" retail sales usually mirror more comprehensive measures of consumer spending, so Tuesday's report suggests the economy could be regaining steam after tax hikes and federal budget cuts dragged on growth in the first half of the year.
"Households may be spending a bit more freely in response to the recent gains in employment," said Paul Dales, an economist at Capital Economics in London.
The U.S. unemployment rate has fallen nearly a percentage point in the last year, though it remains historically high at 7.4 percent.
The core measure of sales outstripped analysts' expectations, while overall sales fell short largely due to a drop in receipts at auto dealers.
Fed Chairman Ben Bernanke said last month that the U.S. central bank could begin reducing monthly bond purchases, which are aimed to lower borrowing costs and boost employment, by the end of the year.
The Fed currently buys $85 billion a month in long term bonds, a program known on Wall Street as QE, or quantitative easing. Many economists expect the Fed to begin tapering its purchases as soon as September.
"Today's number (for retail sales) should keep the Fed on track to curtail quantitative easing," said Joseph Trevisani, chief market strategist at WorldWideMarkets in Woodcliff Lake, New Jersey.
Yields on government debt rose following the data, a sign that investors believed the chances of the Fed tightening policy had increased. U.S. stock prices rose.
In July, sales jumped 0.6 percent at U.S. department stores, the biggest gain since March 2012. There were also strong gains in sales at health and personal goods stores.
In a further sign that economic activity could accelerate in the second half of the year, the National Federation of Independent Business showed that sentiment improved among small business owners in July.
However, the Commerce Department said in a second report that retail inventories outside of the auto sector, which go into the department's GDP calculations, dipped in June. The weakness of the reading led economists to slightly lower their estimates for second-quarter growth.
The government reported last month that the economy expanded at a rate of 1.7 percent in the April-June period.
Another report from the Labor Department showed U.S. import prices rose less than expected in July, which points to benign inflation pressures.
Reporting by Jason Lange; Additional reporting by Lucia Mutikani in Washington and by; Nick Olivari and Richard Leong in New York; Editing by Paul Simao