USA retail sales post biggest drop in 16 months

Terrell Bush
June 15, 2017

United States 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.

Consumer prices edged down 0.1 per cent last month following a small 0.2 per cent increase in April, the Labor Department reported Wednesday. This eased inflation on a year-on-year basis to 1.9 percent and thereby marks the first reading below 2 percent since November 2016. Core inflation, which excludes volatile energy and food items, rose by 1.7% year-on-year, posting its smallest increase since May 2015.

The Fed said on Wednesday it expected annual inflation rates to "remain somewhat" below 2 percent in the near term but stabilize around the central bank's target over the medium term. 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. The U.S. dollar has usually softened in 2017; however, this is not yet showing up in higher prices at the consumer level, said TD Economics.

In a separate report, the Labor Department said its Consumer Price Index dipped 0.1 per cent, weighed down by declining prices for gasoline, apparel, airline fares, communication and medical care services, among others.

The second drop in the CPI in three months could worry Federal Reserve officials, who have previously viewed the weakness in inflation as transitory. Recent data have suggested that inflation may even be slowing further.

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

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.

Similarly, mining sector output grew at 4.2 per cent during the month under review compared to 6.7 year ago.

According to the CSO data, manufacturing sector, which constitutes 77.63 per cent to the IIP, grew at 2.6 per cent in April compared to 5.5 per cent in same month a year ago. Sales at building material stores were unchanged, while receipts at clothing stores rose 0.3 per cent. In retail sales, broader trends are still clearly intact - home improvement and e-commerce is continuing to gain at the expense of department stores.

Nevertheless, James Bohnaker of IHS Markit said seasonal factors likely exaggerated the effect of falling energy prices on overall inflation because gasoline prices typically rise in the spring, ahead of the U.S. driving season. That has led some retailers, including Macy's M.N , Sears SHLD.O and Abercrombie & Fitch ANF.N to announce shop closures. Sales at electronics and appliance stores plunged 2.8 per cent, the largest drop since March 2010. Excluding automobiles, retail sales also contracted by 0.3% on a monthly basis.

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