The measure of consumer spending fell 0.2% after a 1.2% gain in January, signaling tepid economic growth for the first quarter.
The gain in inventories followed a 0.1% drop in March and was fueled by a 0.5% increase in retail inventories after a 0.7% decline the previous month.
The second straight monthly gain indicates consumer spending is picking up after rising only 1.1% in the first quarter.
While sales rose only 0.2% in October, the slowdown from September largely reflected the unwinding of hurricane-related consumer spending.
Sales unexpectedly fell 0.2% last month and economists are trimming GDP growth forecasts for Q3 because of the effects of Hurricane Harvey.
The July sales report supports expectations that the U.S. economy will continue on its modest growth path.
The March sales report is another sign that consumers “have retrenched a bit in terms of spending in recent months."
U.S. retail sales rose only 0.1% in February but are still 3.7% higher in the first two months of 2017 than the same period last year.
January's 0.6% rise in the CPI and continued strength in retail sales "show the economy is starting the year off with a bang."
Sales picked up momentum after a slow start to the holiday season, bringing the gain for all of 2016 to 3.3%.
It was the smallest gain in three months but year-over-year sales were up 3.8%, suggesting a positive start to the holiday shopping season.
"This is just the kind of data the Fed doves need to see to convince them to hike rates in December,” an economist says of the October jump.
