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June 15, 2017

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US retail sales fall biggest in 16 months in May

US retail sales in May recorded their biggest drop in 16 months and consumer prices unexpectedly fell, suggesting a softening in domestic demand that could limit the Federal Reserve’s ability to continue raising interest rates this year.

The Fed was expected to raise borrowing costs later yesterday, but the signs of moderate consumer spending and easing inflation pressures could worry policymakers who have previously viewed the softness as transitory.

“It won’t stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year,” said Paul Ashworth, chief US economist at Capital Economics in Toronto.

The Commerce Department said retail sales fell 0.3 percent last month amid declining purchases of motor vehicles and discretionary spending after an unrevised 0.4 percent increase in April. May’s decline was the largest since January 2016 and confounded economists’ expectations for a 0.1 percent gain.

Retail sales rose 3.8 percent in May on a year-on-year basis. While some of the drop in monthly retail sales reflected lower gasoline prices, which weighed on receipts at service stations, details of the report were generally weak.

Excluding automobiles, gasoline, building materials and food services, retail sales were flat last month after an upwardly revised 0.6 percent rise in April. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously reported to have risen 0.2 percent in April.

Consumer spending accounts for over two-thirds of the US economy and last month’s weak core retail sales reading could temper hopes for a sharp acceleration in economic growth in the second quarter. The economy grew at a 1.2 percent annual rate in the first quarter, held back by a near stall in consumer spending and a slower pace of inventory investment.

Output increased at a 2.1 percent pace in the October-December period. The Atlanta Fed is forecasting GDP rising at a 3.0 percent annualized rate in the second quarter.

In a separate report, the Labor Department said its Consumer Price Index dipped 0.1 percent, weighed down by declining prices for gasoline, apparel, airline fares, communication and medical care services, among others. The CPI rose 0.2 percent in April.

It was the second drop in the CPI in three months. In the 12 months through May, the CPI rose 1.9 percent, the smallest gain since last November. The CPI rose 2.2 percent in the 12 months through April.


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