According to a Department of Commerce report, consumer prices fell in May 2016, and retail sales experienced a 0.3 percent decline – the largest drop in 16 months. According to an economic news release by the Department of Labor on June 14th, the Consumer Price Index decreased 0.1 percent in May, due to the falling prices of airline fares, gasoline, apparel, and medical care.
The decline in prices of consumer products and services may impact the Federal Reserve’s future confidence in the U.S. economy, despite having increased interest rates for the second time in 2017 (on the same day the May consumer spending figures came out). After sales rose 0.4 percent in April – sales profiting from the Easter holiday and American workers receiving tax refunds – economists had predicted an increase in sales for May as well, but expectations fell short.
These statistics suggest that consumers were careful spenders in May, despite the concurrent lowest unemployment rate in 16 years. Electronics stores saw a 2.8 percent drop in their sales – the greatest since March of 2016. Sales at gasoline stations fell 2.4 percent, and 1 percent at department stores. This decrease was the largest for electronics stores in over seven years, and the biggest for department stores since July 2016, an implication of an ongoing struggle against their online retail competition.
Overlooking May’s disappointing retail sales figures, the Fed raised short-term interest rates in the interest of upholding stable prices and employment. Associating part of the reason for the downturn to the shift of one-time price drops in wireless telephone services and prescription drugs. Chairwoman Janet Yellen said of the policy makers’ decision, “Household spending which was particularly soft earlier this year has been supported by solid fundamentals, including ongoing improvement in the job market, and relatively high levels of consumer sentiment and wealth.”
Consumer spending constitutes around 70 percent of the U.S. economy. Economists predict retail sales will bounce back this summer, after a slow start to 2017 and the consumer spending slip that accounted for the 1.2 percent annual rate of economic expansion from January through March. Gus Faucher, chief economist at PNC Financial Services, speculates, “More jobs, rising wages, low inflation, rising home sales, and low interest rates will continue to push consumer spending forward in 2017.” In big picture terms, retail sales continue to rise in line with the growth of the U.S. economy as sales are up 3.9 percent in the first five months of 2017.
Read more here – “Drop in U.S. Retail Sales Signals Uneven Consumer Spending,” (Sho Chandra, Bloomberg)