Gains in Retail Sales, Consumer Prices Reignite Inflation Anxiety
Unexpected increases in consumer prices and retail sales during July sparked renewed concern Tuesday about U.S. inflation, sending stock and bond prices plunging.
“The Federal Reserve [Board] may be falling behind the curve on curtailto 6.79%ing inflation,” said Richard Yamarone, an economist at Market Data Corp. of Rye Brook, N.Y. “People are nervous.”
The consumer price index rose at a faster-than-expected 0.3% rate last month as higher food, housing and medical costs outweighed lower energy and transportation prices, according to Labor Department statistics.
Even though auto sales were weak, U.S. retail sales unexpectedly rose 0.1% in July, Commerce Department figures show. Excluding autos, sales climbed 0.3%, paced by higher food costs.
Taken together, the latest economic reports helped send the benchmark 30-year Treasury bond, a gauge of the inflation outlook, skidding more than a point, pushing up its yield 0.11 percentage points to 6.79%.
Stocks also plunged as the Dow Jones industrial average slumped 57.70 points to close at 5,647.28.
Still, for all of the market dislocation, the chance of a rate increase at next Tuesday’s Fed policy meeting remains “near zero,” said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. in Chicago.
Separately on Tuesday, the National Assn. of Realtors reported that U.S. homes resales advanced in the second quarter for most of the nation.
Resales of single-family homes, townhouses, apartments, condominiums and co-ops in 46 states were at 4.70 million for the second quarter, a 16.3% jump from the same quarter a year ago, the real estate industry group said.
In California, existing home sales climbed 31.2% during the second quarter from a year ago, which the California Assn. of Realtors said was the highest quarterly sales level in more than six years.
Indeed, some analysts said investor inflation concerns are exaggerated because retail sales outside of food remain sluggish and much of the CPI increase was confined to food and housing. In Boston, Bill Cheyney, chief economist at John Hancock Financial Services, said Fed policymakers “don’t have to raise interest rates before the presidential election.”
Part of the problem is Americans’ take-home pay isn’t growing. In a separate report issued Tuesday, the Labor Department said U.S. weekly earnings adjusted for inflation showed the biggest drop in six months in July, contrary to other recent signs of wage inflation.
Real average weekly earnings declined 1.5% last month after rising 2.2% in June. Average hourly earnings, a measure of wage inflation, fell 0.2% while average weekly hours worked fell 1.2%.
Also feeding Wall Street’s inflation fears on Tuesday, the core CPI rate, which excludes food and energy costs, rose a larger-than-expected 0.3% in July. About 55% of the CPI measures the cost of services, ranging from health care to airline fares.
Additionally, for the first seven months of the year, the CPI was running at a 3.5% annual rate, up from 2.9% in the same period last year and 2.5% for all of last year.
Before Tuesday’s Labor Department report, analysts had expected a 0.2% rise in nominal and core CPI and a 0.2% decline in retail sales in July.
In June, CPI rose just 0.1% while the core rate increased 0.2%.
* WALL STREET
Readings send Dow down 57 points, long-bond yield up 0.11. D3
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Consumer Prices Percentage change, month to month, seasonally adjusted:
‘96: July: 0.3%
Source: Bureau of Labor Statistics (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Retail Sales Total retail sales in billons of dollars, seasonally adjusted: 1996: $204.7
Sources: Commerce Department
