Retail Sales Declines Could Halt Further Interest Rate Hikes

The Federal Reserve’s ability to continue to raise interest rates in 2017 may be halted given consumer prices fell unexpectedly last month amid the biggest drop in retail sales in more than a year.

According to a report in Reuters citing the Federal Reserve, the Fed increased borrowing costs for the second time in 2017 but also acknowledged the moderation recently in inflation pressures. The Fed still expects the economy to expand moderately and for labor market conditions to strengthen more.  “The latest inflation data have undoubtedly helped the case of officials arguing for waiting more than three months for the next move,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics, told Reuters.

Hurt by declining prices for gas, clothes, airline tickets, cars, communication and medical care services and other categories, the Labor Department said the Consumer Price Index fell 0.1 percent in May, marking the second drop in the CPI in three months. In April the CPI saw a 0.2 percent increase. In the 12 months ended in May the CPI increased 1.9 percent, which Reuters said is the tiniest increase since November.  Even with the dip the year-over-year gain in the CPI was bigger than the 1.6 percent average annual increase over the last decade.

On Wednesday (June 14), the Fed said annual inflation rates should “remain somewhat” below 2 percent in the short term and stabilize around its target over the medium term. The Fed said it is monitoring inflation closely. If weakness in inflation continues it could prevent the agency from raising interest rates, according to economists polled by Reuters. ”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 the report.