(Adds details, analyst comments, updates markets)
* Retail sales fall 0.3 percent in May
* Core retail sales unchanged; April revised up
* Consumer price index dips 0.1 percent in May
* Core CPI gains 0.1 percent; up 1.7 percent year-on-year
By Lucia Mutikani
WASHINGTON, June 14 U.S. retail sales in May
recorded their biggest drop in 16 months and consumer prices
unexpectedly fell, suggesting a softening in domestic demand
that could limit the Federal Reserve's ability to continue
raising interest rates this year.
The Fed is expected to increase borrowing costs later on
Wednesday, but the signs of moderate consumer spending and
retreating inflation pressures could worry policymakers who have
previously viewed the softness as transitory.
"It won't stop the Fed from hiking interest rates later
today, but it increases the downside risks to our forecast that
there will be a further two rate hikes in the second half of
this year," said Paul Ashworth, chief U.S. economist at Capital
Economics in Toronto.
The Commerce Department said retail sales fell 0.3 percent
last month amid declining purchases of motor vehicles and
discretionary spending after an unrevised 0.4 percent increase
in April. May's decline was the largest since January 2016 and
confounded economists' expectations for a 0.1 percent gain.
Retail sales rose 3.8 percent in May on a year-on-year
basis. While some of the drop in monthly retail sales reflected
lower gasoline prices, which weighed on receipts at service
stations, details of the report were generally weak.
Excluding automobiles, gasoline, building materials and food
services, retail sales were unchanged last month after an
upwardly revised 0.6 percent rise in April. These so-called core
retail sales correspond most closely with the consumer spending
component of gross domestic product and were previously reported
to have increased 0.2 percent in April.
Consumer spending accounts for more than two-thirds of the
U.S. economy and last month's weak core retail sales reading
could temper expectations for a sharp acceleration in economic
growth in the second quarter. The economy grew at a 1.2 percent
annualized rate in the first quarter, held back by a near stall
in consumer spending and a slower pace of inventory investment.
Output increased at a 2.1 percent pace in the
October-December period. The Atlanta Fed is forecasting GDP
rising at a 3.0 percent annualized rate in the second quarter.
In a separate report, the Labor Department said its Consumer
Price Index dipped 0.1 percent, weighed down by declining prices
for gasoline, apparel, airline fares, communication and medical
care services, among others. The CPI rose 0.2 percent in April.
It was the second drop in the CPI in three months. In the 12
months through May, the CPI increased 1.9 percent, the smallest
increase since last November. The CPI rose 2.2 percent in the 12
months through April.
The Fed has a 2 percent inflation target and tracks an
inflation measure which is currently at 1.5 percent.
RETREATING INFLATION PRESSURES
While the U.S. central bank is expected to raise interest
rates by 25 basis points on Wednesday, the second hike this
year, the weakness in inflation and retail sales, if sustained,
could put further monetary tightening in jeopardy.
The dollar fell to a seven-month low against a basket of
currencies on the data, while prices for U.S. Treasuries rose.
U.S. stocks were trading slightly lower.
The year-on-year gain in the CPI in May was still larger
than the 1.6 percent average annual increase over the past 10
years. Economists polled by Reuters had forecast the CPI
unchanged last month and advancing 2.0 percent from a year ago.
The so-called core CPI, which strips out food and energy
costs, rose 0.1 percent in May after a similar gain in April.
The core CPI increased 1.7 percent year-on-year, the smallest
rise since May 2015, after advancing 1.9 percent in April.
"It will be difficult to continue characterizing the recent
inflation pullback as transitory," said Chris Low, chief
economist at FTN Financial in New York.
Last month, rental costs increased 0.3 percent, matching
April's gain. Owners' equivalent rent of primary residence
advanced 0.2 percent after a similar increase in April.
Gasoline prices recorded their largest drop since February
2016, while food prices rose for a fifth straight month.
In the retail sales report, auto sales fell 0.2 percent in
May and receipts at service stations dropped by the most since
Department store sales recorded their biggest drop since
July 2016. Department store sales are being undercut by online
retailers, led by Amazon.com. That has led some
retailers, including Macy's, Sears and
Abercrombie & Fitch to announce shop closures.
Sales at online retailers increased 0.8 percent last month
after rising 0.9 percent in April. Sales at electronics and
appliance stores suffered their largest drop since March 2010.
Americans also cut back on spending at restaurants and bars, as
well as at sporting goods and hobby stores.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)