WRAPUP 4-US consumer prices, retail sales weaken in May

Tammy Harvey
June 15, 2017

U.S. consumer prices fell 0.1% for May compared with consensus forecasts of prices being unchanged on the month while the year-on-year inflation rate declined to 1.9% from 2.2% previously and compared with an expected rate of 2.0%.

United States consumer prices fell more than expected in May, according to the Department of Labor's monthly consumer price index (CPI).

Over the past 12 months, consumer prices are up 1.9 percent while core inflation has risen 1.7 percent. Among the major areas of weakness, electronics store sales fell 2.8% vs. April and are now down 0.2% year to date. Core inflation, which excludes volatile energy and food items, rose by 1.7% year-on-year, posting its smallest increase since May 2015.

Markets widely expect the Fed to raise its benchmark rate by 25 bps and investors will mostly be looking for guidance on the future path of interest rate increases. Owners' equivalent rent of primary residence advanced 0.2 per cent after a similar increase in April.

June 14 The dollar index on Wednesday fell to its lowest since November 9 against a basket of major currencies that measure its strength after the release of weaker-than-expected U.S. CPI and retail sales data. Power generation rose by 5.4 per cent in April, down from 14.4 per cent expansion in April past year. In addition to a drop in energy costs last month, the price of clothing, airline fares and medical care also declined. The main shelter index that contributes one third to the main CPI basket was up 0.2 percent on a sequential basis.

Earlier this month, RBI left key interest rate unchanged as it wanted to be more sure that inflation will stay subdued.

The cost of food, however, increased for the fifth straight month.

"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 USA economist at Capital Economics in Toronto. The Fed's preferred measure of inflation, tied to consumer spending, has been below 2 percent for five years and in recent months slipped back a bit.

"Unemployment remains at a multi-decade low of 4.6%, but wage growth for the three months to April undershot economists' forecasts, meaning the squeeze on household finances is worse than previously thought".

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

The fall in headline inflation was in large part attributed to the significant decline in gasoline prices, which recorded their largest contraction since February past year. That has led some retailers, including Macy's M.N , Sears SHLD.O and Abercrombie & Fitch ANF.N to announce shop closures. And April retail sales were revised upward to a 0.4 percent gain, from 0.3 percent initially reported.

Restaurants and bars also saw a 0.1 percent decline in May.

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