U.S. inflation unexpectedly slowed in September despite a pick-up in retail sales, keeping pressure on the Federal Reserve to act soon to lessen the risk of a downward price spiral.

U.S. Federal Reserve Chairman Ben Bernanke signaled the central bank would likely ease policy further in a speech in Boston on Friday morning, and investors expect the Fed will launch a new asset-buying spree as soon as next month.

The overall consumer price index rose 0.1 percent in September and the core index, which excludes volatile food and energy prices, remained unchanged for the second straight month, data released by the Labor Department showed Friday.

"If anything that may make them more likely to embark on asset purchases, and that may mean they're going to be more aggressive with those asset purchases," said Richard Bryant, head of treasury trading at MF Global Securities in New York.

U.S. stock index futures rose and prices of U.S. Treasury securities fell following the release of the data, while the dollar initially slipped further.

DEFLATION RISK

A prolonged drop in prices would likely lead consumers to put off purchases and businesses to cancel investments, compounding economic woes.
Investors expect the Fed could pump billions of dollars into the economy, in a second major round of "quantitative easing", to support the recovery.

"(This) gives the Fed room to do whatever it wants to do," said Jim Awad, managing director at Zephyr Management in New York.

At the same time, sales at U.S. retail sales rose by a stronger-than-expected 0.6 percent in September, lifted by big-ticket items including autos, electronics and appliances, Commerce Department figures showed.

The reading suggested consumption may have been a bit stronger than economists had anticipated in the third quarter.

Meanwhile, a gauge of manufacturing in New York State jumped in October, lifted by improvements in new orders and shipments, the New York Federal Reserve said in a report.

The New York Fed's "Empire State" general business conditions index rose to 15.73 in October from 4.14 in September.

"Retail sales and the Empire State index were strong, suggesting the economy is indeed improving. But inflation remains low and troubling," said Hugh Johnson, chief investment officer at Hugh Johnson Advisors in Albany, New York.

The U.S. economy slowed sharply in the second quarter, weighed down by a hefty trade gap and dwindling fiscal stimulus.

The weak economy has kept the pressure on President Obama's Democratic party, which looks likely to lose control of the U.S. House of Representatives in Nov. 2 elections.