Retail prices recorded their biggest hike in eight months in September, according to a new report, while separate ones show the best improvement in retail sales in more than two years amid consumer sentiment hitting its highest level since 2004.

While the 0.5% rise in the Consumer Price Index last month was slightly less than a consensus estimate from analysts, it is the biggest increase since January and pushed the year-over-year gain higher to 2.2%, up from 1.9% in August, according to the Labor Department on Friday..

A jump in energy prices was almost entirely responsible for the rise in the headline year-over-year rate to back above a 2% rate in September. Gasoline prices surged 13% higher on a month-over-month basis in September, and are up almost 20% from a year ago, as production disruptions at petroleum refineries in the U.S. gulf coast region tied to Hurricane Harvey hit gasoline supplies. 

Most of that increase should ultimately prove transitory as production recovers, according to Nathan Janzen, senior economist at RBC Economic Research.

“Outside of the energy component, trends were little changed,” he said. “Core prices (those excluding food and energy), growth held steady at 1.7% on a year-over-year basis for a fifth consecutive month.”

He noted that the nation’s economic backdrop still looks solid and labor markets are increasingly tight so it is more likely that underlying inflation pressures will move higher than lower going forward. 

“With most non-price indicators suggesting that the U.S. economy is quite close to capacity, we continue to think that more interest rate hikes will be warranted,” Janzen said. “Nonetheless, near-term inflation pressures still look relatively benign, so we also continue to expect the pace of [interest rate] increases will be very gradual.”

The overall jump in consumer prices came as little surprise following a separate Labor Department report the day before that showed 0.4% increase last month in the Producer Price Index following a 0.2% gain in August. Over the past year the PPI jumped 2.6%, the biggest gain since February 2012 and followed a 2.4% hike in August. It too was mainly driving higher by increased gasoline prices.

Retail Sales Bound Back Big Time

Meantime, a Commerce Department report, also released Friday, showed U.S. retail sales in September roared back to life, advancing 1.6% from the month before and following a 0.2% drop in August.

While the September level was just slightly below a consensus estimate from Wall Street analysts it was the biggest gain since March 2015, which translated into a 4.4% year-over-year improvement in the CPI.

The gain was led by receipts at auto dealers and sales at gasoline stations, improving 3.6% and 5.8%, respectively, from the month before.

Excluding automobiles, gasoline, building materials and foodservices, so-called “core retail sales” increased 0.4% last month after being unchanged in August.

Retail sales ended the third quarter with a bang, according to analysts at Wells Fargo Securities, who noted the gain will give a boost to personal consumption expenditures, which started the third quarter on a weak note.

“Overall, the retail and food services [sector] report for September was strong but it was also a mixed bag in terms of sector performance with…very weak sectors,” they said in a note to investors.

Within general merchandise stores sales, department store sales were lower once again, this time by 0.4%, while miscellaneous store retailers’ sales were down by 0.6%. In contrast, non-store retailers’ sales, which include online sales, were up 0.5% higher during the month.

Consumer Sentiment Leaps

Finally, a report on consumers’ feelings during October, also released Friday, blew away expectations, with it soaring to its highest level in just over 13 years.

The University of Michigan Survey of Consumers showed strong gains from the month before and year over year in its measures of consumer sentiment as well as their feelings about current and future economic conditions.

The October gain was broadly shared, occurring among all age and income subgroups and across all partisan viewpoints, according to Surveys of Consumers Chief Economist Richard Curtin.

“The data indicate a robust outlook for consumer spending that extends the current expansion to at least mid 2018, which would mark the second longest expansion since the mid 1800's,” he said. “While the early October surge indicates greater optimism about the future course of the economy, it also reflects an unmistakable sense among consumers that economic prospects are now about as good as could be expected."

In other words, Curtin said this "as good as it gets" outlook is supported by a moderation in the expected pace of growth in both personal finances and the overall economyy and is, accompanied by a growing sense that, even with this moderation, it would still mean the continuation of good economic times.

“Although such an outlook is typically recorded in the late phase of an expansion, its occurrence is independent of the ultimate length of an expansion,” he said. “Indeed, nothing in the latest survey indicates that consumers anticipate an economic downturn anytime soon-- which contrarians may consider a clear warning sign of trouble ahead.”

According to Curtin, consumers anticipate low unemployment, low inflation, small increases in interest rates, and most importantly, modest income gains in the year ahead.

“It is this acceptance of lackluster growth rates in personal income and in the overall economy that signifies that consumers have accepted, however reluctantly, limits on the pace of improving prospects for living standards,” he added.