Consumer prices fell more than expected in May

Robyn Ryan
June 15, 2017

USA consumer prices are rising at the slowest pace in half a year and consumers last month showed renewed signs of caution, potential complications for the Federal Reserve as it charts out plans for short-term interest rates through the rest of the year.

The Labor Department said consumer prices edged down 0.1 per cent last month following a small 0.2 per cent increase in April.

Given that the energy prices were widely anticipated to fall, eyes were on core inflation, which rose a modest 0.1 percent in the recent string of weak readings.

The so-called core CPI, which strips out food and energy costs, rose 0.1 per cent in May after a similar gain in April.

However, Fed officials have said they believe the recent slowdown in price gains reflected transitory factors and they expect inflation will resume moving toward 2 per cent as low unemployment helps to boost wages. 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. On Wednesday, June 14, 2017, the Labor Department reports on US consumer prices for May. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.

In a separate report, the Labor Department said its Consumer Price Index dipped 0.1 per cent, weighed down by declining prices for gasoline, apparel, airline fares, communication and medical care services, among others. The main shelter index that contributes one third to the main CPI basket was up 0.2 percent on a sequential basis.

"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 US economist at Capital Economics in Toronto.

The 12-month overall price measure fell below the Fed's two per cent target to 1.9 per cent last month, continuing a steady decline since February, while the core, which has been falling since January, slipped another two-tenths to 1.7 per cent.

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

Clothing costs dropped 0.8 per cent in May while the cost of new cars and used cars both fell 0.2 per cent. Food prices climbed 0.2% last month and were up 0.9% from a year earlier.

Vehicle sales remained sluggish for the month, falling 0.2 percent in May, while electronics and appliance sales saw their largest monthly decrease in more than seven years, plunging 2.8 percent. Receipts at service stations dropped 2.4 per cent, the largest decline since February 2016. Department store sales are being undercut by online retailers, led by Amazon.com.

Analysts had projected CPI to be flat, and retail sales to rise 0.1 per cent.

The Central Statistics Office (CSO) revised upwards the IIP growth figure for March to 3.75 per cent from provisional estimate of 2.7 per cent released last month. Receipts at restaurants and bars dipped 0.1 per cent, while sales at sporting goods and hobby stores fell 0.6 per cent.

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