US retail sales, consumer prices slump in March

[WASHINGTON] US retail sales fell for a second straight month in March and consumer prices dropped for the first time in 13 months, supporting views that the economy lost significant momentum in the first quarter.

But with the labour market near full employment, the decline in both sales and consumer prices is likely to be temporary and probably does not change expectations that the Federal Reserve will raise interest rates again in June.

"Some Fed officials will be disturbed by the unexpected drop back in core inflation, but this won't prevent a June rate hike," said Paul Ashworth, chief US economist at Capital Economics in Toronto.

The Commerce Department said on Friday retail sales dropped 0.2 per cent last month after a 0.3 per cent decrease in February, which was the first and biggest decline in nearly a year. Compared to March last year retail sales increased 5.2 per cent.

Economists polled by Reuters had forecast retail sales slipping 0.1 per cent last month. Excluding automobiles, gasoline, building materials and food services, retail sales rebounded 0.5 per cent after falling 0.2 per cent in February.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Despite last month's increase in core retail sales, consumer spending likely braked sharply in the first quarter after growing at a brisk 3.5 per cent annualised rate in the final three months of 2016. The apparent slowdown in consumption is partly blamed on the late disbursement of income tax refunds by the government as it sought to combat fraud.

The Atlanta Fed is forecasting GDP rising at a 0.6 per cent rate in the first quarter. This would be the weakest performance in three years and follows a 2.1 per cent growth pace in the fourth quarter.

With job growth averaging 178,000 per month in the first quarter, the anticipated slowdown in GDP likely understates the health of the economy. In addition, first-quarter GDP tends to be weaker because of calculation problems that the government has acknowledged and is working to resolve.

Retail sales last month were dragged down by receipts at auto dealerships, which fell 1.2 per cent, decreasing for a third straight month. Sales at service stations dropped one per cent, reflecting lower gasoline prices.

Receipts at building material stores fell 1.5 per cent, likely as bad weather halted work at construction sites. There were, however, areas of strength in March's retail sales report.

Sales at electronics and appliances stores surged 2.6 per cent, the largest increase since June 2015. Receipts at clothing stores climbed one per cent, the biggest advance since February 2016. Retailers have been hurt by declining mall traffic and increased competition from online retailers, led by Amazon.com.

That has forced retailers like J C Penney Co Inc, Abercrombie & Fitch and Macy's Inc to scale back on brick-and-mortar operations.

The dollar was little moved by the data. US stocks and Treasuries markets are closed for the Good Friday holiday.

In a separate report, the Labor Department said its Consumer Price Index dropped 0.3 per cent in March, the first decline since February 2016, as declining costs for gasoline and mobile phone services offset rising rents and food prices.

The CPI nudging up 0.1 per cent in February. In the 12 months through March, the CPI rose 2.4 per cent, slowing from February's 2.7 per cent increase.

The so-called core CPI, which strips out food and energy costs, fell 0.1 per cent, the first and largest decrease since January 2010, after rising 0.2 per cent in February. As a result, the year-on-year increase slowed to two per cent.

That was the smallest advance since November 2015 and followed a 2.2 per cent increase in February. The Fed has a two per cent inflation target and tracks an inflation measure which is currently at 1.8 per cent.

A 6.2 per cent drop in gasoline prices was the biggest factor in the monthly decline in the CPI. Monthly consumer inflation was also weighed down by a record 7 per cent drop in the cost of wireless telephone services. Still, consumers paid more for food and rents last month.

Rents increased 0.3 per cent in March after a similar gain in February. Owners' equivalent rent of primary residence rose 0.2 per cent after climbing 0.3 per cent in February.

Food prices rose 0.3 per cent. The cost of food consumed at home increased 0.5 per cent, the biggest gain since May 2014.

REUTERS