US inflation flat in June while retail sales sink

A sign announcing the store will be closing hangs on the door of the 60-year-old Sears store in the Galewood neighborhood on July 7, 2017 in Chicago, Illinois.
A sign announcing the store will be closing hangs on the door of the 60-year-old Sears store in the Galewood neighborhood on July 7, 2017 in Chicago, Illinois.PHOTO: AFP

WASHINGTON (REUTERS) - US consumer prices were unchanged in June and retail sales fell for a second straight month, pointing to tame inflation that could diminish prospects of a third interest rate increase from the Federal Reserve this year.

The soft domestic demand could also temper expectations of strong acceleration in economic growth in the second quarter.

The Labor Department said on Friday (July 14) that the unchanged reading in its Consumer Price Index came as the cost of gasoline and mobile phone services declined further. The CPI's drop of 0.1 per cent in May and the lack of a rebound in June could trouble Fed officials who have largely viewed the recent moderation in price pressures as transitory.

Policymakers are confronted with benign inflation and a tight a labour market as they weigh a third rate hike and announcing plans to start reducing the central bank's US$4.2 trillion (S$5.78 trillion) portfolio of Treasury bonds and mortgage-backed securities.

In the 12 months through June, the CPI increased 1.6 per cent - the smallest gain since October 2016 - after rising 1.9 per cent in May. The year-on-year CPI has been softening steadily since February, when it hit 2.7 per cent.

Economists had forecast the CPI edging up 0.1 per cent last month and climbing 1.7 per cent from a year ago.

The so-called core CPI, which strips out food and energy costs, edged up 0.1 per cent in June, rising by the same margin for three straight months. The core CPI increased 1.7 per cent year-on-year after a similar gain in May.

The Fed has a 2 per cent inflation target and tracks a measure which is currently at 1.4 per cent.

In a separate report, the Commerce Department said retail sales fell 0.2 per cent last month, weighed down by declines in receipts at service stations, clothing stores and supermarkets.

Americans also cut back on spending at restaurants and bars, as well as on hobbies. May's retail sales were revised to show a 0.1 per cent dip instead of the previously reported 0.3 per cent drop. Retail sales rose 2.8 per cent year-on-year in June.

Excluding automobiles, gasoline, building materials and food services, retail sales slipped 0.1 percent last month after being unchanged in May. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Tepid consumer spending and a moderate pace of inventory investment restricted economic growth to a 1.4 percent annualized rate in the first quarter.

The Atlanta Federal Reserve is forecasting GDP to have risen at a 2.6 per cent annualized rate in the second quarter. Last month, auto sales edged up 0.1 per cent after rising 0.9 per cent in May. Sales at online retailers rose 0.4 per cent last month after increasing 0.8 percent in May.