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WRAPUP 3-Weak US consumer prices, retail sales put spotlight on Fed

15 June 2017

USA retail sales in May recorded their biggest drop in 16 months and consumer prices unexpectedly fell month over month, suggesting inflation pressures are moderating, which could impact further Federal Reserve interest rate increases this year.

The consumer-price index, which measures what Americans pay for everything from dog food to doctors' visits, declined a seasonally adjusted 0.1% in May from the prior month, the Labor Department said Wednesday. A double dose of weak retail and inflation data sent the 10-year Treasury yield tumbling 6 basis points to 2.15%, near a seven-month low. It forecast that prices will rise just 1.6 percent this year, down from a March forecast of 1.9 percent.

The so-called core CPI, which strips out food and energy costs, rose 0.1 per cent in May after a similar gain in April.

Retail inflation slumped to record low of 2.18 per cent in May driven by sharp drop in kitchen staples like vegetables and pulses, strengthening government's case for lowering of interest rate by RBI. Gas station sales were down 2.4 percent month-over-month, but electronics/appliances were also down 2.8 percent after rising 2.2 percent in April.

USA retail sales recorded their biggest drop in more than a year in May amid declining purchases of motor vehicles and discretionary spending, which could temper expectations for a sharp acceleration in economic growth in the second quarter. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.

The monthly core CPI was restrained by decreases in the prices of apparel, airline fares, communication and medical care services.

The inflation measure the Federal Reserve tracks is now at 1.5%, while the central bank's target is at 2%.

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Shelter costs - which account for about a third of the overall price index - increased 0.2% on the month and rose 3.3% on the year. Some economists suggested that even though the Fed foresees one more rate hike this year, the persistently low inflation may lead it to leave rates alone until 2018.

Last month, rental costs increased 0.3 percent, matching April's gain. Unemployment in May dipped to 4.3 percent.

The Fed has a 2 per cent inflation target and tracks an inflation measure which is now at 1.5 per cent.

Department store sales tumbled 1.0 percent, the largest drop since July 2016.

Despite the weak report, analysts noted that April's sales numbers were revised significantly upward, especially in the "control" group of goods, which excludes gasoline, cars and building materials.

For now, Fed officials don't appear overly concerned with the recent downward path, attributing it at least in part to one-time drops in prices for things like wireless telephone services and prescription drugs. Department store sales are being undercut by online retailers, led by Sales at restaurants and bars slipped 0.1%.