On the day the Federal Reserve is expected to raise the target for the federal funds rate for the second time this year, key economic reports have posted declines showing broad weakness. Retail sales and the Consumer Price Index fell 0.3 percent and 0.1 percent, respectively, suggesting that despite a strong labor market and monetary policy that is still extraordinarily supportive, neither economic growth nor consumer price increases are accelerating sharply.
Retail sales and food-services spending together fell 0.3 percent in May, following a 0.4 percent gain April and a 0.1 percent increase in March. Excluding the volatile auto and energy categories, core retail sales and food services were flat in May after gains of 0.4 percent in both April and March. Over the past year, total retail sales and food services were up 3.8 percent through May, while core retail sales and food services have increased 3.5 percent.
Weakness in May was widespread among the retail-spending categories. Declines were led by a 2.8 percent fall at electronics and appliance stores and a 2.4 percent drop at gasoline stations (volatility in gasoline spending tends to reflect changes in prices). Motor vehicle spending fell 0.2 percent as unit vehicle sales dropped 1.4 percent to a 16.6 million annualized rate in May.
On the positive side, clothing-store sales rose 0.3 percent for the month and online spending at non-store retailers rose 0.8 percent. Non-store retail spending has risen 10.2 percent from a year ago, second only to the 10.8 percent rise in spending at building material, garden equipment and supplies dealers. Online retail sales now account for 12.3 percent of all retail sales, up from 5 percent in 1997.
Concerning prices, the CPI fell 0.1 percent in May but is up 1.9 percent from a year ago. The volatile food and energy components had sharply different results, with food prices up 0.2 percent while energy prices fell 2.7 percent. In the food category, food-store prices rose 0.1 percent but are down 0.2 percent from a year ago while restaurant prices rose 0.2 percent in May and are up 2.3 percent over the past year. Among the energy components’ prices in May, commodities dropped 6.2 percent while services rose 0.7 percent. Over the past year, energy-goods prices have increased 6.1 percent while energy-services prices have gained 4.8 percent.
Excluding food and energy, the core CPI rose 0.1 percent in May and is up 1.7 percent from a year ago. Within the core, goods prices fell 0.3 percent and are off 0.8 percent from a year ago. Core-goods prices continue to be essentially flat, rising at a 0.1 percent annualized rate over the past 20 years.
Upward pressures on core consumer prices are almost entirely in core services. Core-services prices rose 0.2 percent in May and are up 2.6 percent from a year ago. Over the past 20 years, core-services prices are up at a 2.8 percent annual pace. Over the past 5- and 20-year periods, the main contributors to services-prices increases have been shelter, medical care — particularly hospitals — and education. More recently, physicians’ services — a component of medical-care services — and education have experienced marked decelerations in price increases and have contributed significantly to the deceleration of the overall core CPI. With health care regulations uncertain and concern over the mounting student-loan burdens growing, the future direction of price changes is unclear therefore close monitoring of these components is warranted.
Despite the weak data for May, the economy appears to be on a moderate growth path, led by a strong labor market. Price pressures vary widely among the various parts of the economy but overall price increases remain tame with the threat of rapid acceleration in the near future minimal.