US 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 U.S. Labor Department said Wednesday that the consumer price index edged down 0.1% last month following a small 0.2% increase in April. 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.
Not surprisingly, that drop in gasoline prices weighed on May retail sales, which fell 0.3 percent compared to April, below expectations that sales would be flat.
The so-called core CPI, which strips out food and energy costs, rose 0.1 percent in May after a similar gain in April as rents continued to increase moderately.
The Federal Reserve is expected to raise interest rates later on Wednesday, but the softness of the inflation might lead some Fed officials to give a second thought about the pace of interest rate hikes. 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.
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And gasoline stations saw sales drop 2.4 percent, the biggest decline since February of a year ago. These included apparel, airline fares, medical care services and communication.
Wall Street was expecting a mild 0.1% rise overall and a 0.2% increase outside the stalling auto sector.
While the U.S. central bank is expected to raise interest rates by 25 basis points on Wednesday, the second hike this year, the weakness in inflation and retail sales, if sustained, could put further monetary tightening in jeopardy. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds. Recent data have suggested that inflation may even be slowing further.
The headline CPI for the 12-months through May fell below the Fed's two percent target to 1.9 percent last month, continuing a steady decline since February. Unemployment in May dipped to 4.3 percent.
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Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged last month after an upwardly revised 0.6 percent rise in April.
Clothing costs dropped 0.8 percent in May while the cost of new cars and used cars both fell 0.2 percent.
Department store sales tumbled 1.0 percent, the largest drop since July 2016. Department store sales are being undercut by online retailers, led by Amazon.com. Sales at electronics and appliance stores plunged 2.8 per cent, the largest drop since March 2010.
Restaurants and bars also saw a 0.1 percent decline in May.
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