U.S. retail sales fell a second straight month in August, brought down by falling gasoline prices and sluggish consumer spending.

Meanwhile, falling energy and commodity prices triggered the biggest drop in U.S. wholesale prices in almost two years last month, a government report showed, further evidence that inflation should moderate in coming months after peaking in July.

Retail sales decreased by 0.3%, the U.S. Commerce Department said today. Economists had estimated a 0.2% increase.

Sales were also revised sharply downward for July, decreasing 0.5%; originally, Commerce said July sales dipped 0.1%. June sales had gone up a mere 0.1%.

Consumer spending makes up about 70% of gross domestic product, the broad measure of economic activity in the U.S.

U.S. sales of automobiles and parts increased 1.9% in August, as carmakers discounted deeply to clear inventory. July sales had plunged 4.3%.

Excluding the jump in auto sales, sales of all other retailers in August dropped by 0.7%. Analysts expected a 0.2% drop. In July, ex-auto sales rose 0.3%.

“This was a weak retail sales result, as falling jobs, home prices and credit availability take their tolls,” wrote BMO Capital Markets Economist Michael Gregory in response to the news. “It also points to a lacklustre result for monthly real personal consumption expenditures.”

Gregory added that U.S. consumers are headed towards the first contraction in real personal consumption expenditures since the 1991 recession.

An economic stimulus plan signed by U.S. President George W. Bush in February sent extra spending money to Americans in the form of tax rebates. But the bulk of the payments stopped in the first part of July.

“The government’s stimulus package has all been distributed, and barring another financial boost from Congress, consumer activity is on a downward path,” wrote CIBC World Markets’ Meny Grauman. “Look for the second half of 2008 to be the low point of this current economic down cycle.”

Meanwhile, the producer price index for finished goods fell 0.9% on a seasonally adjusted basis in August, the U.S. Labor Department said today.

That’s the biggest monthly drop in wholesale inflation since October 2006. The annual rate fell slightly from July’s 27-year high, but at 9.6% remained quite elevated, reflecting sharp wholesale price increases in previous months.

Core prices, which exclude food and energy, rose at their fastest annual rate in 17 years, which could fan concerns that past increases in food, energy and commodity prices have started to become entrenched in the broader economy.

The core index, which excludes food and energy, rose a modest 0.2% last month compared to July but jumped 3.6% from a year ago.

Economists surveyed by Dow Jones Newswires had expected a 0.4% drop in the overall index and 0.2% core rise.

IE