Unexpected drop of 0.3%, hammered by inflation

Retail sales turned negative in May as consumers cut spending as inflation rose, the Commerce Department reported Wednesday.

Expected retail and restaurant spending fell 0.3% for the month, below the Dow Jones estimate for a 0.1% gain. Excluding autos, sales rose 0.5%, below expectations of a 0.8% increase.

The figures are not adjusted for inflation, which increased by 1% for the month on the overall figure and by 0.6% excluding food and energy.

Sales were well below the pace of April, which posted a downwardly revised increase of 0.7% from the initial estimate of 0.9%.

Spending for the month fell even as gas station sales rose 4% as fuel prices hit new highs, with regular unleaded hitting $4.43 a gallon in May and now around of $5. This growth was offset by a 3.5% decline at motor vehicle and parts dealers.

Miscellaneous retailers reported a 1.1% drop in sales, while online stores posted a 1% decline. Bars and restaurants recorded a 0.7% increase, part of a broader trend that saw spending gradually shift from goods to services.

On an annual basis, sales were still up 8.1% as spending, combined with higher prices, put a floor under the numbers. Consumers bucked the wave of inflation, using their savings to offset higher costs.

The retail release comes on the same day that the Federal Reserve is expected to raise interest rates by three-quarters of a percentage point in a bid to rein in inflation. The consumer price index for May reflected an 8.6% year-over-year increase, the highest since December 1981 and well above the Fed’s 2% target.

cnbc Business

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