USA consumer prices dip 0.1 per cent in May

Lucy Hill
June 15, 2017

Consumer Price Index (CPI), a main gauge of inflation, fell 0.1 percent in May on a seasonally adjusted basis, compared to 0.2 percent increase in the previous month, said the Labor Department on Wednesday. May's decline was the largest since January 2016 and confounded economists' expectations for a 0.1 per cent gain.

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. 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.

"From out of nowhere we have now had three months of unusual weakness in underlying prices", said Paul Ashworth, chief economist at Capital Economics. The economy grew at a 1.2 per cent annualised rate in the first quarter, held back by a near stall in consumer spending and a slower pace of inventory investment. In addition to a drop in energy costs last month, the price of clothing, airline fares and medical care also declined.

Wall Street was expecting a mild 0.1% rise overall and a 0.2% increase outside the stalling auto sector.

It was the second drop in the CPI in three months. The core CPI increased 1.7 percent year-on-year, the smallest rise since May 2015, after advancing 1.9 percent in April.

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

In May, energy prices fell sharply to reflect lower oil prices. The index, which tracks the greenback against the currencies of major United States trade counterparts, was above the 97 level before the data release.

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Fed futures markets on Wednesday showed the chances of another increase before the end of the year, which had been seen as highly likely in September or December, had fallen below 50 percent.

The Canadian dollar rose 0.45 percent, hitting its highest against the USA dollar since February 27.

The Fed kept forecast for economic growth this year of 2.2 percent, up slightly from its March forecast, with growth of 2.1 percent in 2018 and 1.9 percent in 2019. Over the past 12 months, food costs are up just 0.9 percent while energy prices have risen 5.4 percent.

Sales sank 2.8 per cent at electronics stores, 2.4 per cent at gasoline stations and 1 per cent at department stores, which have struggled with competition from online retailers.

The cost of food, however, increased for the fifth straight month.

Turning to retail sales, those fell by 0.3% month-on-month in May, marking their biggest drop since January a year ago.

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. In retail sales, broader trends are still clearly intact - home improvement and e-commerce is continuing to gain at the expense of department stores.

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