Flat US inflation raises questions for Fed
Cheap energy prices kept US inflation flat in June, according to data released Friday, again raising questions about the central bank's case for continued interest rate increases.
The falling price of gasoline also helped hold down US retail sales, which contracted for the second straight month in June, while manufacturing output rose slightly but slowed in the second quarter, according to two separate reports Friday.
Slow inflation and stagnant wage growth has baffled economists given the very low unemployment rate, but US central bankers continue to say they expect inflation to rebound allowing them to raise the benchmark interest rate gradually.
The Fed has raised rates twice this year and is expected to do so once more, though probably not until December.
However, "The current data provide few reassurances for the Federal Reserve" about the growth outlook, economist Diane Swonk said. "The prospects for a third hike in short-term interest rates this year continue to dim."
The Consumer Price Index, which tracks the costs of household goods and services, was unchanged last month after falling 0.1 percent in May, the Labor Department reported.
The less volatile 12-month CPI measure slowed three-tenths from May to 1.6 percent, meaning it has slowed by more than a full percentage point since February, retreating further from the Fed's two percent target.
However, CPI excluding food and energy, categories which can see big swings, rose 0.1 percent last month, the third straight increase. The annual core inflation rate was 1.7 percent, the same as May but six-tenths slower than January.
The annual pace of inflation so far in 2017 has been less than half that recorded at this point last year.
Federal Reserve Chair Janet Yellen has attributed the slow inflation this year to one-off, "transitory" factors, although she said central bankers are watching the data carefully. But Chris Low of FTN financial said the transitory weak inflation was starting to overstay its welcome.
"There was widespread price weakness in components stretching far beyond cell phone plans and prescription drugs," he said in a research note, pointing to the main factors Yellen has cited.
Joel Naroff of Naroff Economic Advisors told clients the economic picture facing the Fed was clearly not what the central bank hoped for.
"With inflation low, consumption soft and manufacturing growth mediocre, it is hard to say the economy's animal instincts are out in full force," he wrote.
Industrial production rose for the fifth straight month in June, increasing 0.4 percent on a continued rise in oil and gas drilling and coal mining. However, manufacturing output was up just 0.2 percent and is up 1.2 percent year-over-year, with capacity well below its peak.
In the retail sector, Americans in June spent less on restaurants, bars and groceries, while the transition from department stores to online retailers like Amazon continued. Overall retail sales fell 0.2 percent for the month to $473.5 billion, a surprise to analysts who had forecast an increase of 0.1 percent.
Weak auto sales, which have been down in the first half of 2017, were not to blame this time: excluding that volatile category, sales were still down 0.2 percent.
Gas stations, however, saw a 1.3 percent drop in sales last month, a time when Americans traditionally hit the road for summer holidays pushing gasoline prices higher.
For the April-June period, sales were up 3.8 percent over the same quarter of 2016.
Ian Shepherdson of Pantheon Macroeconomics said the data was "inexplicably soft."