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Weak retail sales, inflation data dim prospect of Fed rate hike

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US retail sales were unexpectedly flat in July as Americans cut back on purchases of clothing and other goods, pointing to a moderation in consumer spending that could temper expectations of an acceleration in economic growth in the third quarter.

[WASHINGTON] US retail sales were unexpectedly flat in July as Americans cut back on purchases of clothing and other goods, pointing to a moderation in consumer spending that could temper expectations of an acceleration in economic growth in the third quarter.

Other data on Friday showed producer prices recorded their biggest drop in nearly a year in July amid declining costs for services and energy goods. Cooling consumer spending and tame inflation suggest the Federal Reserve will probably not raise interest rates anytime soon despite a robust labour market.

July's unchanged retail sales reading followed an upwardly revised 0.8 per cent increase in June, the Commerce Department said. Retail sales in June were previously reported to have increased 0.6 per cent. Sales rose 2.3 per cent from a year ago.

Excluding automobiles, gasoline, building materials and food services, retail sales were also unchanged last month after rising 0.5 per cent in June.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had forecast overall retail sales rising 0.4 per cent and core sales climbing 0.3 per cent last month.

In a separate report, the Labour Department said its producer price index for final demand dropped 0.4 per cent last month, the first decline since March and the largest since September 2015. It increased 0.5 per cent in June.

In the 12 months through July, the PPI slipped 0.2 per cent. That was the biggest drop since December 2015 and followed a 0.3 per cent increase in the 12 months through June. Economists had forecast the PPI edging up 0.1 per cent last month and gaining 0.2 per cent from a year ago.

A strong dollar and cheaper oil continue to keep price pressures muted, leaving inflation running persistently below the Fed's 2 per cent target. Fed officials have repeatedly expressed concern about persistently low inflation.

The US central bank raised its benchmark overnight interest rate last December for the first time in nearly a decade. Although a Reuters poll on Thursday found that most economists expect another rate increase in December, financial markets currently anticipate such a move only next year.

Interest rate futures after Friday's data placed only a 43 per cent probability of a December rate hike, compared to 47 per cent before the data.

Robust consumer spending has helped to cushion the blow on the economy from an inventory correction and the prolonged drag from lower oil prices that have restricted GDP growth to an average 1.0 per cent annualized rate in the last three quarters.

Friday's data suggested consumer spending was cooling after the second quarter's brisk 4.2 per cent rate of increase.

Despite the surprise weakness in retail sales in July, consumer spending remains supported by a strong labour market as well as rising home and stock market prices. The economy created a total of 547,000 jobs in June and July.

The Atlanta Fed is currently forecasting the economy to grow at a 3.7 per cent annualized rate in the third quarter.

Automobile, furniture and online sales were bright spots in the July report. Sales at auto dealerships increased 1.1 per cent last month after rising 0.5 per cent in June.

Online retail sales jumped 1.3 per cent, while receipts at clothing stores fell 0.5 per cent.

With consumers cutting back on discretionary spending, sales at sporting goods and hobby stores fell 2.2 per cent, the largest drop since January 2015. Receipts at building materials and garden equipment retailers fell 0.5 per cent.

There were declines in sales at electronics and appliance outlets and service stations. Americans also cut back on spending at restaurants and bars.

REUTERS