Soft Pricing Contributes to Soft Spending in May
- May Retail Sales decreased by 0.3 percent, as gasoline prices fell.
- The Consumer Price Index fell by 0.1 percent in May, as the energy price index declined by 2.7 percent.
- The Producer Price Index for final demand was unchanged in May.
Retail sales for May eased by 0.3 percent, in part due to lower gasoline prices. Service station sales were off by 2.4 percent for the month. Other categories were weak as well. Electronics and appliance store sales were down by 2.8 percent. General merchandise stores gave up 0.3 percent. Unit auto sales dropped from a 16.9 million unit annual rate in April to 16.7 in May. The dollar value of retail sales for autos was down by 0.2 percent for the month. Excluding autos, retail sales were also down by 0.3 percent. Despite the soft retail numbers for May, real (inflation adjusted) consumer spending in the second quarter looks like it is bouncing back after a weak first quarter and this will support stronger GDP growth. We will see the first estimate of Q2 GDP at the end of July.
With gasoline prices lower in May, the headline Consumer Price Index dipped by 0.1 percent. The energy price index was down by 2.7 percent. Excluding food and energy, core CPI increased by 0.1 percent. Both new and used motor vehicle prices were down by 0.2 percent for the month. Over the previous 12 months, the headline CPI was up by 1.9 percent, while core CPI was up by 1.7 percent. The 12-month change in the CPI has dropped steadily since peaking at 2.7 percent last February.
The Producer Price Index for final demand was unchanged in May. The energy price index for final demand goods was down by 3.0 percent, reflecting lower refinery product prices. Food prices were down by 0.2 percent. There was more pricing pressure on the services side where the PPI for final demand services gained 0.3 percent in May. The core PPI for final demand (less food, energy and trade) dipped by 0.1 percent in May. Over the previous 12 months, the PPI for final demand grew by 2.4 percent, and core PPI was up 2.1 percent. If energy prices stay tame, the year-ago comparisons for the headline PPI series are near or past their peak.
With less push from energy prices, inflation measures are tame. This could have an impact on Federal Reserve monetary policy as policy makers start to question their expectations about future interest rates given lower inflation. We still expect the Fed to raise the fed funds rate this afternoon. They will also release a new set of economic forecasts and a new “dot plot” that may show a slightly shallower uphill path for interest rates in 2018.
Market Reaction: Equity markets were mixed at the open. The 10-year Treasury yield is down to 2.11 percent. NYMEX crude oil is down to $46.09/barrel. Natural gas futures are up to $2.98/mmbtu.
For a PDF version of this Comerica Economic Alert click here: Retail_Sales_06142017.