Wholesale Prices, Retail Sales Fall

U.S. wholesale prices fell by 0.4 percent in May, the biggest decline in five months, largely reflecting lower costs for gasoline and other energy products.

But that didn't motivate consumers. Retail sales in May saw their sharpest monthly decline since November, weighed down by slower auto sales and lower prices at the gas pump.

The Commerce Department said overall retail sales slid 0.9 percent in May and a smaller 0.4 percent excluding autos. The drops were larger than Wall Street analysts had been projecting and cast some doubt on the strength of consumer demand entering the summer.

The decline in the Producer Price Index, which measures inflation pressures before they reach consumers and was reported by the Labor Department on Thursday, also was a surprise to many analysts. They were forecasting a tiny 0.1 percent advance in the index.

Consumers meanwhile trimmed spending on cars and clothes. Sales at auto and parts dealers dropped 2.5 percent while gas station sales fell a hefty 3.1 percent, their biggest fall since December, largely reflecting lower gasoline prices in the month.

Consumer spending makes up two-thirds of economic activity and was a mainstay for the economy through the slump that began last year. Bond prices rose, the U.S. dollar eased and stock futures softened on the weak number.

The report was the second in as many days to show households pulling back on spending. On Wednesday, the Federal Reserve's anecdotal "beige book" report said U.S. retail sales were flat in late April and in May and that car sales in particular were mixed.

Analysts said Thursday's retail data, along with reports showing tame wholesale inflation and first-time claims for unemployment insurance, supported that notion.

"This certainly makes it unlikely for the Fed to move before September. Barring anything dramatic, it probably puts the Fed on the sidelines until September," said Rick Egelton, deputy chief economist with Bank of Montreal/Harris Bank.

Prices paid to factories, farmers and other producers fell for two months in a row, suggesting that inflation continues to be under control. In April, wholesale prices dipped by 0.2 percent.

Excluding volatile energy and food prices, the "core" rate of inflation at the wholesale level was flat in May, after having edged up 0.1 percent the month before.

Given the tame readings, Federal Reserve policy-makers will have leeway to keep short-term interest rates at 40-year lows to help with the economic recovery.

Most economists predict the Fed will leave rates unchanged at its meeting later this month and into the summer.

Federal Reserve Chairman Alan Greenspan and his colleagues have expressed concerns about the vitality of the recovery in the months ahead. Among their concerns: how consumers, whose spending accounts for two-thirds of all economic activity, will hold up; and when businesses will invest in new plants and equipment on a sustained basis, a key ingredient in a full recovery.

Separately, new claims for unemployment insurance rose last week by a smaller-than-expected 6,000 to 390,000, the department reported. Even with the increase, new claims hovered below the 400,000 mark, a level associated with weakness in the jobs market.

Also encouraging was that the number of laid-off workers continuing to draw unemployment benefits dipped to 3.77 million, for the week ending June 1, the most recent period for which the information is available. Early in May, these so-called continuing claims hit a nearly two-decade high of 3.83 million

The unexpected decline in wholesale prices in May stemmed in large part from a 2.3 percent drop in energy costs, which had risen sharply the month before. World oil prices recently cooled off as global output increased, fears of supply disruptions receded and demand was sluggish.

Gasoline prices went down 9.6 percent in May, the biggest decline in six months. Heating oil prices fell 4 percent, residential natural gas prices declined 0.5 percent and residential electric power prices edged down 0.1 percent.

Food prices nudged down 0.2 percent, after falling by a sharper 3.2 percent in April. Falling prices for beef and veal, pork, and dairy products outweighed rising prices for chickens, vegetables and fruits.

Costs for light trucks, such as sport utility vehicles, declined by 0.9 percent in May, while car prices rose 0.4 percent.

For the 12 months ending in May, wholesale prices fell 2.7 percent.

Falling prices can offer some good deals for consumers. But for companies whose product prices are going down, it means more pressure on already pressed profit margins.