Retail Sales Weaken; Wholesale Prices Jump

MBA (7/16/2008 ) Velz, Orawin
Rising food and energy prices are evident in retail sales and wholesale inflation data. Retail sales edged up 0.1 percent in June, following a 0.8 percent gain in May.

Despite nearly $50 billion of stimulus checks distributed during the month, retail sales posted the weakest increase since the 0.2 percent decline in February. A 3.3 percent drop in auto sales was responsible for the decline. Excluding autos, retail sales increased 0.8 percent, the slowest pace in three months.
Sales at gasoline stations surged 4.6 percent in June as gasoline prices soared. Housing-related sales, including those at building supply, appliances and furniture stores, saw sharp drops. Sales rose at apparel, sporting goods and hobby stores. Sales also increased strongly at grocery stores, driven by higher prices.

Retail sales excluding autos, gasoline and building materials—the portions used to calculate the consumer spending component of gross domestic product (GDP)—rose by 0.3 percent, decelerating from a 0.7 percent increase in May and a 0.9 percent increase in April. Retail sales account for about 40 percent of total consumer spending, with spending on services accounting for the rest.

A separate report showed that overall wholesale prices surged in June. The Producer Price Index (PPI) rose 1.8 percent, following a 1.4 percent increase in May. Large increases in food and energy prices drove the overall increase. Over the past year, the PPI rose 9.1 percent, the largest gain since June 1981.

Excluding food and energy items, the core PPI was up a modest 0.2 percent for the second consecutive month. From a year ago, the core PPI rose 3.1 percent, the largest gain since December 1991.

In his semiannual Monetary Policy report to Congress, Fed Chairman Ben Bernanke has grown more pessimistic about economic growth and inflation outlook. According to the post-meeting statement from the Federal Open Market Committee on June 25, when the FOMC left the federal funds rate unchanged at 2.0 percent, the Fed said that downside risks to growth have “diminished.” However, Bernanke noted in yesterday’s testimony that there are “significant” downside risks to growth outlook, due to the possibility of higher energy prices, tighter credit market and a deeper housing decline.

At the same time, upside inflation risks have “intensified,” given elevated energy and commodity prices and the declining dollar. Bernanke argued that the Fed must be vigilant to any signs that inflation will get out of control, including rising inflation expectations and potential wage inflation.

It appeared that Bernanke used hawkish rhetoric to keep inflation expectations anchored; however, given renewed financial turmoil, it is unlikely that a rate hike is imminent. The next FOMC meeting will be on Aug. 5. Fed fund futures expected the Fed to leave the target rate unchanged but saw about a 60 percent chance of an increase to 2.25 percent by year end. The yield on 10-year Treasuries stayed around 3.83 percent by mid-Tuesday afternoon, two basis points lower than the closing rate on Monday.