US Inflation Demurs as Fed Hike Expected

Retail inflation eases to 2.99% in April

Retail inflation eases to 2.99% in April

The Fed is expected to increase borrowing costs later on Wednesday, but the signs of moderate consumer spending and retreating inflation pressures could worry policymakers who have previously viewed the softness as transitory.

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.

Most retail names are down roughly 1 percent on the weaker-than-expected retail sales.

In a separate report, the Commerce Department said retail sales fell 0.3 percent last month amid declining purchases of motor vehicles and discretionary spending after a 0.4 percent increase in April.

Economists have said they think consumer spending, which accounts for about 70 per cent of US economic activity, will pick up in the spring and summer after a slow start to 2017.

"The latest inflation data have undoubtedly helped the case of officials arguing for waiting more than three months for the next move", said Jim O'Sullivan, chief USA economist at High Frequency Economics in Valhalla, New York. By then, the Fed's forecast would put its key policy rate at 3 percent.

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"Clearly officials will be mindful of incoming inflation trends in the coming months before greater confidence can be made with second half of the year policy normalization plans", said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

The likelihood of a rate hike in September has significantly weakened, however, with futures rates showing just a 17 percent chance of an increase, down from 28 percent before the data release on Wednesday, according to CME Group's FedWatch.

Medical services such as the cost of doctor's visits dipped 0.1 percent in May but have risen 2.5 percent over the past 12 months. The Fed still foresees prices, as measured by a gauge tied to consumer spending, rising 2 percent in 2018 and 2019, achieving its target.

Falling US gasoline prices drove inflation and retail sales down in May, defying expectations and raising more questions about the economy and the pace of interest rate increases this year.

In May, energy prices fell sharply to reflect lower oil prices. Prices for U.S. Treasuries rallied, while stocks on Wall Street were little changed. On a year-on-year basis, core inflation came in at 1.7 percent, which is the lowest reading in two years, noted TD Economics in a research report.

American consumers forked out a total of US$473.8 billion (RM2 trillion) for the month, 3.8 per cent above May of a year ago.

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In the 12 months through May, the CPI increased 1.9 percent, that was the smallest increase since last November and followed a 2.2 percent gain in April.

Economists had projected CPI to be flat, and retail sales to rise 0.1 percent.

Gasoline stations saw sales fall 2.4 per cent, the biggest dip since February of a year ago. Food prices rose for a fifth straight month.

Retail sales were still down 0.3 per cent even after excluding the more volatile food and cars categories, the first decline for the core measure since August. Receipts at service stations dropped 2.4 per cent, the largest decline since February 2016.

Despite the weak report, analysts noted that April's sales numbers were revised significantly upward, especially in the "control" group of goods, which excludes gasoline, cars and building materials. Department store sales are being undercut by online retailers, led by AMZN.O . Sales at electronics and appliance stores plunged 2.8 per cent, the largest drop since March 2010. This marks the third consecutive decline and leaves prices 0.8 percent lower than one year ago.

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