Published: Thu, June 15, 2017
Markets | By Lucia Cruz

US consumer prices dip 0.1 percent in May

US consumer prices dip 0.1 percent in May

Retail inflation slumped to record low of 2.18 per cent in May driven by sharp drop in kitchen staples like vegetables and pulses, strengthening government's case for lowering of interest rate by RBI.

The Labor Department said on Wednesday its Consumer Price Index dipped 0.1 percent last month after rising 0.2 percent in April.

And gasoline stations saw sales drop 2.4 percent, the biggest decline since February of past year.

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

"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 percent annualized rate in the first quarter after notching a 2.1 percent pace in the October-December period.

The monthly core CPI was restrained by decreases in the prices of apparel, airline fares, communication and medical care services.

"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. In addition, a smaller drawdown than expected in crude oil inventories is dropping oil stocks 1-4 percent. The CPI rose 2.2 per cent in the 12 months through April.

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.

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While the United States central bank is expected to raise interest rates by 25 basis points on Wednesday, the second hike this year, the weakness in inflation and retail sales, if sustained, could put further monetary tightening in jeopardy.

What happened? It appears that a number of factors were involved: rents were lower than expected, along with consumer goods 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.

American consumers forked out a total of US$473.8 billion (RM2 trillion) for the month, 3.8 per cent above May of past year. Core inflation, which excludes volatile energy and food items, rose by 1.7% year-on-year, posting its smallest increase since May 2015. A double dose of weak retail and inflation data sent the 10-year Treasury yield tumbling 6 basis points to 2.15%, near a seven-month low.

Last month, rental costs increased 0.3 percent, matching April's gain.

Gasoline stations saw sales fall 2.4 per cent, the biggest dip since February of previous year. On a year-on-year basis, shelter costs rose 3.3 percent and have been a key driver lifting services inflation in the last two years.

Clothing costs dropped 0.8 percent in May while the cost of new cars and used cars both fell 0.2 percent. Department store sales are being undercut by online retailers, led by Amazon.com AMZN.O .

Analysts had projected CPI to be flat, and retail sales to rise 0.1 per cent. Sales at electronics and appliance stores plunged 2.8 per cent, the largest drop since March 2010.

Receipts at restaurants and bars dipped 0.1 percent, while sales at sporting goods and hobby stores fell 0.6 percent.

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