Updated from 10:35 a.m. EDT

The increase in retail sales reported for May by the Commerce Department shows a potential for inflation that some economists worry will be consummated in Tuesday's consumer price index.

Monday's report showing a 1.2% gain over April quieted concerns that prior months' sales were unsustainably inflated by tax refund checks and mortgage re-financings. But fanning inflation fears was the source of the strength: surging gas station sales, fed by skyrocketing energy prices.

"The consumer is intact," said Michael Gregory, senior economist at BMO Nesbitt Burns, who predicted that an increase in job wages will boost consumer spending even more. But, he said, "If you combine a perception of pricing power amid strong demand, it's easier for businesses to pass along higher costs to consumers."

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Total retail sales in May rose to $335.8 billion on a seasonally adjusted basis, from $331.9 billion in April. Total retail sales for April were revised lower to a decline of 0.6% from March, compared with a previous reading of a 0.5% decrease.

Excluding automobile sales, retail sales increased 0.7% to $257 billion in May, ahead of the consensus for a 0.6% increase. That compared with a 0.1% decrease in the April period.

Gas station sales rose 22.5% from May 2003 levels to $26.02 billion. In addition, building material and garden equipment and supplies dealer sales rose 16.6% from last year to $30.5 billion.

The jump in gasoline station sales could portend inflation, said Wesley Beal, an economist at IDEA Global. "To me, that means the headline consumer price index number tomorrow is going to be 0.5%," matching the consensus estimate. That would compare with the prior month's 0.2% increase and March's 0.5% increase.

Beal isn't concerned inflation will get out of hand. "What the Fed is saying about the 'measured response' will be enough to keep inflation in check," he said.

Gregory wouldn't be surprised to see a 0.3% increase in the CPI, excluding energy and food prices. That would be ahead of the consensus estimate for a 0.2% rise. "No one wants to forecast something bigger than that because you necessitate having to forecast the implications," he said.

Gregory also noted that import prices increased 0.4% in May on top of a 0.3% increase in April and a 0.2% increase in March.

Vincent Malanga, president of LaSalle Economics, said automobile dealers -- concerned about a weak April -- panicked and sold cars and trucks at reduced prices, slightly exaggerating May's results.

"This inflation problem is overblown," Malanga said

Total May retail sales rose 8.9% over total sales in the May 2003 period, the department said. Sales excluding automobiles increased 9.8% in May from last year.

On a month-to-month basis, motor vehicle and parts dealers sales increased 2.7% in May to $78.8 billion, while gas station sales rose 4% from April to May.

The core consumer price increases in last three to four months reflected three things, according to Malanga: last year's decline in the dollar, an increase in raw materials prices and some one-time price increases that don't occur on a regular basis, such as hotel rates.

"Since January, the dollar has been firming and raw material prices have been easing," Malanga said. "That should start to feed through into the price indexes and send them in the opposite direction."

But Gregory disagrees. "All you need is a sign that wage costs are going up," said Gregory. "Before you know it, businesses say, 'we're pushing up prices' and then inflation breaks 3.5%, which becomes too much."

A report from retail trade association National Retail Federation backed the government's sales data. The NRF said retail sales in May increased 0.8% from April and 5.9% from May 2003. The NRF tracks general merchandise stores, clothing and clothing accessories stores, furniture and home furnishings stores, electronics and appliances stores, and sporting goods, hobby, book and music stores.

Sales at clothing and clothing accessories stores rose 0.9% over April, the NRF said. Meanwhile, general merchandise stores had a 1.3% increase over April and 7.8% over last year.

"As the economy continues to pick up steam, retailers are reaping the benefits," said NRF Chief Economist Rosalind Wells. "The job market has long been the missing piece of the economic puzzle. With recent good news regarding job creation, all the pieces have fallen into place."