Sunday, 25 June, 2017

Retail Sales Unexpectedly Fall, Core Inflation Hits 2-Year Low Before Fed

Retail inflation drops to record low of 2.18% in May Retail inflation drops to record low of 2.18% in May
Julia Daniel | 15 June, 2017, 02:15

Prices were up 1.7% on the year when excluding food and energy, the weakest mark in two years.

US 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.

"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.

Sunil Kumar Sinha, Principal Economist, India Ratings & Research, said though inflation is going to remain low and well within the comfort zone of RBI, probability of large policy rate cut is low.

"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".

The Atlanta Fed is forecasting the economy growing at a 3.0 percent annualized rate in the second quarter, but this estimate could be trimmed following the weak core retail sales. Sales at electronics and appliance stores plunged 2.8 percent, the largest drop since March 2010.

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.

Investors were still expecting the Federal Open Markets Committee to increase US overnight interest rates later on Wednesday at the conclusion of its June policy meeting.

Growth is expected to pick up this quarter after being held back by a near stall in consumer spending and a slower pace of inventory investment at the start of the year. These included apparel, airline fares, medical care services and communication. Over the past 12 months, food costs are up just 0.9 per cent while energy prices have risen 5.4 per cent.

Specifically, gasoline prices fell by 6.4%. USA stock index futures pared gains. 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. Food prices rose for a fifth straight month.

The Fed's preferred inflation gauge, the price index for personal-consumption expenditures, poked above the central bank's 2% target in February for the first time in almost five years but settled down to 1.7% in April, the most recent month for which data is available.

CPI inflation in May is at the lower end of the RBI's projected headline inflation band of 2-3.5 per cent in the first half the current fiscal.

The cost of goods and services for American consumers fell in May for the second time in three months as inflation continued to recede from a recent high-water mark.

Sales at nonstore retailers led by Amazon (AMZN) and building materials suppliers such as Home Depot (HD) have been the strongest categories, while sales at department stores such as Macy's (M) continue to bleed. Sales at restaurants and bars slipped 0.1%.

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