Strong consumer demand and record gasoline prices pushed U.S. retail sales higher in May and propelled the U.S. trade deficit to a new record in April, a pair of government reports said on Monday.

Retail sales rose a greater-than-expected 1.2% in May to a seasonally adjusted $335.8 billion, the Commerce Department said. Gasoline sales increased 4%, the biggest gain since February 2003. Gasoline prices hit a record weekly high in the United States in late May.

Sales of autos and auto parts increased 2.7%, while sales of clothing, food, and health and personal care products also showed gains.

While high gasoline prices might be diverting some spending from other areas, the fact is that consumer demand remains strong overall, said BMO Nesbitt Burns Inc. chief economist Sherry Cooper

“With businesses exhibiting a substantial and growing degree of pricing power these days, signs of strong demand point to increasing risks of higher costs being passed on to consumers,” Cooper said in a report. “The Fed is worried about this and the consequent prospects for higher headline inflation. All eyes therefore are now on tomorrow’s CPI report.

A second Commerce Department report showed the U.S. trade deficit widened unexpectedly in April to a record $48.3 billion, as strong consumer demand and the highest oil prices in 21 years pushed imports to a record $142.3 billion. At the same time, exports tumbled slightly from March.

China’s trade deficit with the U.S. widened to $12.0 billion — the third highest reading ever — behind only September and October of 2003. The trade gap between the U.S. and China through the first four months of 2004 was $42.2 billion and is on pace to smash last year’s record $124.1 billion record, particularly if Chinese efforts to restrain domestic growth are successful.

“The drop in the U.S. dollar barely made a dent in the trade deficit, and the pick up in global demand has been more than offset by strong U.S. domestic demand growth,” said Cooper.

Carl Gomez, economist with RBC Financial Group, said that as in the first quarter, trade is acting as a net drag on U.S. economic growth. “This is largely the result of a slight appreciation of the trade-weighted dollar during April and because the United States is currently leading the world recovery,” he said in a report.

“Nevertheless, the U.S. economy is likely to turn in another above-trend growth performance in the second quarter because strong domestic demand and a substantial increase in inventory replenishment will offset much of the drag on the external side.”

The overall U.S. trade gap is also on track to break last year’s record of $496.5 billion.