Retail sales rose more than economists expected in June, reinforcing indications of U.S. economic strength from substantial employment growth as well as modest inflation.

The 0.6% gain in retail sales for the month, despite a slowdown in auto sales, topped economists' expectations for a 0.1% increase.

The news came as the government announced that consumer prices rose 0.2% in June, with inflation excluding the volatile food and energy categories also rising 0.2%.

The gains bring total core inflation as measured by the Consumer Price Index to 2.3% for the last 12 months, slightly above the Federal Reserve's 2% inflation target, as measured by a different set of inflation statistics that have been showing smaller price increases.

The news points to an economy that is benefiting from a strengthening labor market, said Richard Moody, chief economist at Regions Financial.

The Fed is expected to hold interest rates where they are at the July meeting of its monetary policy committee, but the overall 3.1% retail-sales gain in the first half of the year, compared with 2015, suggests that consumer spending is relatively healthy and inflation remains in check. That frees the central bank to wait and see if events overseas will damage the U.S. economy before its next rate hike.

"This leaves inflation-adjusted consumer spending on track for annualized growth of better than 4% for the second quarter -- clearly the trend rate is not this strong, but neither is it as weak as the first quarter," when consumer spending rose 1.5%, Moody said. "As long as job and income growth hold up while inflation and interest rates remain low, consumers will remain the key driver of overall growth in the U.S. economy."

A 1.1% jump in seasonally adjusted online sales led the retail sales report, as Internet stores like Amazon  (AMZN) and Expedia (EXPE) posted bigger gains than any other part of retail -- up 14.2% from a year ago.

Building materials retailers like Home Depot (HD) and Lowe's (LOW) saw sales spike 3.9%, for a 7.6% year-over-year gain that has tracked increases in existing home sales and remodeling.

Gas station sales rose 1.2% on higher prices, but are down for the year as crude oil has moved back under $50 a barrel. Drugstores like CVS (CVS) and department stores like Macy's (M) and Kohl's (KSS) each saw sales rise 0.7% for the month

The only decline was a 0.3% dip in sales by bars and restaurants, the Commerce Department said.

Retail sales were expected to cool off after car companies like Ford (F) and General Motors (GM) reported that U.S. sales rose at the slowest pace in more than a year during June.

Consumer prices including food and energy are up just 1% from a year ago, the Labor Department reported. In June, food prices dropped along with the cost of electricity, while gasoline prices rose 3.3%.

Prices fell for vehicles and apparel, while the biggest gain was the 1.1% jump in prices for medical commodities, which are up 3.2% in the last year.

The news comes after bullish reports on second-quarter growth in China, and better-than-expected auto sales in the eurozone. 

"Inflation is gradually clawing its way higher but there isn't any urgency for the Fed to raise rates -- the Fed should aim to overshoot its inflation target,'' said Ryan Sweet, an economist at Moody's Analytics. Because of "global headwinds that are keeping interest rates down," he added, "a reputation for disinflation is harder to buck than a reputation for high inflation."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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