Flat prices flag lower US rates

DIANE COYLE

Economics Correspondent

Retail spending in the US was unexpectedly weak in May, while consumer prices showed no evidence of inflationary dangers. The latest figures cemented the view in financial markets that the Federal Reserve will cut interest rates in July.

The figures initially took the dollar lower, although it remained above the Y83.70 it had touched in Tokyo trading. Dealers were cautious in case of central bank intervention in advance of this week's G7 summit. US bond prices were more than a point higher by mid-morning.

Suzanne Rizzo, an economist at HSBC Markets in New York, said: "Retail sales have been weak for several months. It increases the odds that the economy is going into recession."

Stuart Parkinson, US economist at Morgan Grenfell, said: "The barriers to the Fed easing rates are falling one by one." He said the Fed would probably act after its policy meeting at the beginning of July. Others still think the central bank will wait until later in the year.

Several Federal Reserve governors, including Alan Blinder, the vice-chairman, have recently hinted that they favour a cut in interest rates.

The US Federal Funds rate, now 6 per cent, has risen seven times since February 1994.

However, Alan Greenspan, chairman of the Fed, said at the weekend it was difficult to draw firm conclusions about future developments in the economy without more information.

Wall Street economists therefore think today's statistics for industrial output last month and the next monthly employment report will be crucial to the Fed's decision. The number of jobs fell by a shock 101,000 in May. Ms Rizzo said: "The setback in employment is what is driving the weakness in consumer spending."

The value of retail sales rose 0.2 per cent last month, far less than expected. Cars, which make up a fifth of total sales, were up 0.5 per cent after a sharp fall in April. Analysts had anticipated a much stronger rebound. Sales of other goods rose 0.1 per cent.

Consumer prices rose 0.3 per cent in May, taking the year-on-year inflation rate to 3.2 per cent. Gasoline prices rose 2.1 per cent, with higher oil prices clearly being passed straight on to consumers.

But seasonal food prices fell after increasing earlier this year. Tomato prices, for instance, dropped 21.4 per cent, more than reversing a 15 per cent jump in April.