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Economic Watch: Retail Sales Bounce Back along with Inflation Pressures

May 12, 2017

By Evan Lockridge

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Retail sales in the U.S. bounced back in April after falling the month before as two readings of inflation also rebounded, all raising the prospect that the Federal Reserve will increase interest rates again in June.

The 0.4% increase in retail sales fell short of Wall Street expectations of a 0.6% hike and follows an upwardly revised 0.1% decline in March. Compared to April 2016, retail sales last month moved up 4.5%, according to a Commerce Department report released Friday.

Leading the increase was a 12.3% jump in sales of gasoline from a year earlier while non-store retailers reported an 11.9% hike. In contrast, sales at department stores last month fell 0.2% from the month before but online retailers reported an increase of 1.4%, the strongest month-over-month gain of any category.

According to RBC Economics Research, spending over the last two months is in line with the view that the slowing in first quarter consumer spending growth was more the result of “normal” volatility in the data and a weather-related pull-back in utilities consumption than the beginning of a new weaker trend. 

“Strong employment growth, rising wages and consumer confidence, and the still simulative stance of monetary policy [by the Federal Reserve] are all pointing to a solid household spending backdrop and the recent data remains in line with our forecast for a 2.8% increase in consumer expenditures in the second quarter that we expect will support a 2.9% increase in gross domestic product, following the surprisingly modest 0.7% annualized gain,” said Nathan Janzen, RBC senior economist.

Consumer and Wholesale Prices Rising

Meantime, separate reports show inflation is rising at both the retail and the wholesale levels, according to two separate Commerce Department reports.

The Consumer Price Index, the main gauge of retail inflation, increased 0.2% in April following a 0.3% drop in March, due in large part to a 1.1% jump in energy prices, the biggest gain since January. This most recent performance matched a consensus estimate from a poll of economists. Over the past 12 months the CPI is up 2.2%.

Core prices, which eliminate the volatile food and energy sectors, showed a 0.1% gain, less than expectations, after a 0.1% drop in March, translating into a 1.9% increase over the past year, the lowest since October 2015.

“Inflation has come off the boil in the last two months, though we don’t see the latest data standing in the way of a June rate hike,” said Josh Nye, senior economist at RBC. “Following last week’s labor market report that showed a rebound in job growth and 4.4% unemployment rate, there seems to be a bit more urgency from Fed officials to continue removing accommodation.”

He said inflation and wage data isn’t yet signaling that a sharp tightening in monetary policy is required, but with unemployment at a 16 -year low and inflation hovering around 2%, RBC expects the Fed will proceed with gradual rate hikes rather than risk falling behind the curve. 

“We think a June rate hike is in order, as well as further tightening over the second half of the year,” Nye said.

This follows a report from the day before showing prices at the wholesale level in April increased more than expected. The 0.5% hike in the Producer Price Index from the month before was broad-based.

The April gain is the largest since January and follows a 0.1% decline in March. Over the past 12 months, the PPI has increased 2.5%, the largest year-over-year increase since it hit 2.8% in February 2012.

Energy prices rebounded 0.8% in April following a March drop while prices for food rose by 0.9% for the second consecutive month. Prices for services moved higher by 0.4% following a 0.1% decline the month before.

Excluding food, energy and trade service prices, a preferred measure by some economists, the PPI jumped 0.7% for the month and is rising at its fastest annual pace on record at 2.1%.

“With gains broad-based and annual rates in the headline and core measures standing at a series high, today’s PPI report signals stronger inflation pressures at the start of the second quarter and also keeps the Federal Reserve on track for a June interest rate hike,” said Sam Bullard, senior economist at Wells Fargo Securities.

The Fed last moved interest rates higher in March, which was its third hike since the first in a series that began in December 2015 after leaving them near a zero level for around seven years.

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