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Consumer Prices, Retail Sales Crash Into Wall

Karl Schamotta July 14, 2017

Consumer price growth in the world’s largest economy hit a wall in June, with prices effectively unchanged from the previous month. The all items index rose 1.6 percent year-on-year, missing market expectations that were set above the 1.7 percent mark, according to numbers released by the Bureau of Labor Statistics a few minutes ago. On a month-over-month basis, core prices rose 0.1 percent, continuing a weakening trend that began in January – suggesting that disinflationary pressures are stronger and more widespread than economists and market participants once believed.

Retail sales fell -0.2 percent, well below the 0.1 percent growth that had been expected, showing that American purse strings remain tightly wound. Sales at brick-and-mortar retail stores took the biggest hit, with the Amazon effect driving an ongoing rotation to cheaper distribution channels – but weakness was widespread. Removing automobile and gas sales, core retail sales fell 0.1 percent, against market forecasts near 0.4 percent. Consumer spending, which accounts for more than two-thirds of the US economy, continues to weaken, suggesting the second and third quarter gross domestic product expectations are headed for a downward revision.

These numbers will come as a blow to policymakers at the Federal Reserve. In minutes taken during the rate-setting committee’s last meeting, it is clear that members remain concerned about low inflation rates, with doubts arising around whether prices are being held down by temporary, transitory influences – or by longer-term economic and technological forces. Janet Yellen’s Congressional testimony also hinted at this earlier in the week, suggesting that today’s numbers could help to keep the Fed on the sidelines for longer.

Should this trend continue through the summer, markets will aggressively depress the expected tightening trajectory, pushing a balance sheet decision later into the autumn months while moving rate hike probabilities into early 2018.

Bottom Line: Economic surprises continue to tilt toward the downside in the world’s largest economy, suggesting that the Federal Reserve’s hawkish stance earlier in the year could once again prove ill-founded. Market participants are increasingly convinced that the central bank’s ‘dot plot’ rate forecast will be adjusted downward, with the yield curve coming under pressure as investors fade the likelihood of rapid monetary tightening. Against this backdrop, the dollar looks set to continue its post-election slide – but it should be noted that weakness in the United States’ role as consumer-of-last-resort implies that exporting countries could soon experience currency weakness of their own.

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