U.S. producer inflation came in higher than expected this morning, as did retail sales, curtailing expectations for further aggressive rate cutting in the U.S. The U.S. Producer Price Index came in up 0.3%, driven mainly by higher gas prices. Core prices were above expectations, up 0.2%.

“Food and energy pressures are likely to remain on the radar screen given pending electricity cost hikes in California and other states, and the impetus to grain prices from a much smaller expected wheat crop. Today’s report, however, provides more evidence that pressure in the foods and energy areas have not so far spread to other sectors,” say CIBC World Markets analysts.

“Although energy prices remain stubbornly high, producer prices do not indicate a worsening of the inflation situation,” say BMO Nesbitt Burns anlaysts. “Further, with sharp cuts to production and employment, the U.S. economic outlook suggests that producer price increases will remain tame, providing no roadblock to further Fed easing.”

But if the spectre of inflation isn’t enough to thwart the Fed, hot retail sales may be. Retail sales were up 0.8% in April, far ahead of everyone’s wildest expectations. Auto sales drove the gains, with help from general merchandise, clothing, and building materials. “Today’s better-than-expected result does not detract from the broader picture of slowing activity. However, it also drives home the point that the consumer is not folding up,” says BMO Nesbitt Burns.

CIBC insists that it will not be enough to derail the Fed, though. “As for the Fed, it is likely to put more weight on the payrolls report than on this unsustainable burst in consumer activity, and we therefore continue to expect a 50 bps cut at next week’s meeting.”

TD Bank economists agree. “Today’s release only partly offsets a number of recent weak indicators and does not imply that the U.S. economy is out of the woods quite yet. Look for the Fed to cut short-term interest rates by another 50 basis points at next Tuesday’s FOMC meeting.”