US consumer prices slipped 0.1 per cent in May

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United States retail sales in May recorded their biggest drop in 16 months and consumer prices unexpectedly fell, suggesting a softening in domestic demand that could limit the Federal Reserve's ability to continue raising interest rates this year.

The Commerce Department said on Wednesday retail sales fell 0.3 percent last month after an unrevised 0.4 percent increase in April.

The increase in the short-term rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers.

The Consumer Price Index, which tracks changes in the cost of household goods and services, declined 0.1 per cent compared to April.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously reported to have increased 0.2 percent in April.

The Fed said on Wednesday it expected annual inflation rates to "remain somewhat" below 2 percent in the near term but stabilize around the central bank's target over the medium term. Owners' equivalent rent of primary residence advanced 0.2 per cent after a similar increase in April.

While the markets do not appear to be reacting to the bad attack in Alexandria, it does appear to be reacting modestly to this morning's disappointing May retail sales and Consumer Price Index (CPI) report.

Most retail names are down roughly 1 percent on the weaker-than-expected retail sales. Monthly prices fell for apparel, airfare, communication and medical care services, the Labor Department said.

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Wall Street was expecting a mild 0.1% rise overall and a 0.2% increase outside the stalling auto sector.

The inflation measure the Federal Reserve tracks is now at 1.5%, while the central bank's target is at 2%. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds. But some economists suggested that the unexpected slowdown in inflation in recent months may cause the Fed to slow the pace of further rate hikes.

Economists polled by Reuters had forecast the CPI unchanged last month and advancing 2.0 percent from a year ago. The Fed's preferred measure of inflation, tied to consumer spending, has been below 2 percent for five years and in recent months slipped back a bit.

Clothing costs dropped 0.8 per cent in May while the cost of new cars and used cars both fell 0.2 per cent.

Department store sales tumbled 1.0 per cent, the largest drop since July 2016.

Gasoline stations saw sales fall 2.4 per cent, the biggest dip since February of previous year. That has led some retailers, including Macy's, Sears and Abercrombie & Fitch to announce shop closures. Food prices climbed 0.2% last month and were up 0.9% from a year earlier.

Restaurants and bars also saw a 0.1 percent decline in May.