Strong US retail sales underscore economy's resilience despite Iran war

* Retail sales increase 0.9% in May, exceeding expectations for a 0.5% gain

* Receipts at service stations surge 3.4%, reflecting higher gasoline prices

* Core retail sales rise 0.7%, but spending at restaurants and bars dips 0.1%

By Lucia Mutikani

WASHINGTON, June 17 (Reuters) - U.S. retail sales increased more than expected in May, with households boosting purchases of motor vehicles even as they paid more for gasoline, but a slowdown is likely as the cushion from larger tax refunds against higher prices diminishes. The fourth straight month of strong retail sales reported by the Commerce Department on Wednesday added to a pickup in job growth in highlighting the economy's resilience despite the oil price shock from the U.S.-led war with Iran. That data, together with rising inflation, have raised the chances of an interest rate hike from the Federal Reserve, though economists argued that the bar for policy tightening is high since oil prices have eased. They expected the U.S. central bank to later on Wednesday leave its benchmark overnight interest rate in the 3.50% to 3.75% range, but ditch the Fed's easing bias.

"The strength of May's retail sales report and the acceleration from April's spending pace will raise more yellow flags at the Fed as it tries to tamp down consumer inflation pressures," said Scott Anderson, chief U.S. economist at BMO Capital Markets.

Retail sales jumped 0.9% last month after a downwardly revised 0.4% gain in April, the Commerce Department's Census Bureau said on Wednesday. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, would rise 0.5% after a previously reported 0.5% increase in April. Sales advanced 6.9% on a year-over-year basis in May. Some of the rise in sales last month reflected higher gasoline prices, with receipts at service stations accelerating 3.4% after rising 2.4% in April. Service station sales soared 26.5% on a year-over-year basis in May. Gasoline prices surged to four-year highs as a result of the war in the Middle East. They have since retreated, with the national retail average slipping below $4 a gallon this week for the first time since April. The U.S. and Iran on Sunday said they had agreed on terms to end ?the war and reopen the Strait of Hormuz. When adjusted for inflation, retail sales increased 0.4%, economists estimated. Tax refunds have combined with a stock market rally to underpin spending, which also has come at the expense of savings.

CONSUMERS HUNTING FOR BARGAINS

Bank of America Institute said an analysis of internal data suggested that "consumer financial health remains strong, with no clear signs of households resorting to borrowing to support spending," but also noted that "some consumers are making more trips to the store, perhaps on the hunt for bargains."

Sales at auto dealerships rebounded 1.2%. Sales at non-store retailers, which include online retailers, jumped 1.5%. Receipts at furniture stores increased 1.0%. There were increases in sales at health and personal care stores, clothing as well as sporting goods, hobby, musical instrument and book stores.

But receipts at food services and drinking places, the only services component in the ?report, dipped 0.1%. This category is considered a key measure of household finances. Sales at building material, garden equipment and supplies dealers were unchanged, as were those at food and beverage stores. Electronics and appliance store receipts fell 0.5%.

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.7% in May after an unrevised 0.5% advance in April. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

The momentum in retail sales is, however, unlikely to be sustained. The tax filing season is over and a big chunk of the refunds has been depleted. Inflation has outpaced wage growth for the past two months and the saving rate dropped to a four-year low in April.

"Consumption regained some momentum over the spring, but the sugar rush from bigger-than-usual tax refunds will wear off soon," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.

For now, consumer spending, which accounts for more than two-thirds of the economy, appears to be accelerating after slowing in the first quarter. The Atlanta Fed's GDP tracker shows the economy growing at a 2.8% annualized rate in the second quarter. The economy grew at a 1.6% pace last quarter. (Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)