The government issued two reports yesterday showing that inflation remained low last month while consumer spending gains, which have been exceptionally strong this year, may be moderating.
The Commerce Department said retail sales rose only slightly in June, as increased spending for a broad range of products was almost offset by a drop in sales by automotive dealers and gasoline stations.
But the 1 percent drop in automotive sales came on the heels of a red-hot May, and analysts weren't ready to conclude that the consumer spending boom that has been a mainstay of the long U.S. economic expansion is really cooling down.
"The June retail sales data show a little moderation, but not enough to draw the inference that a meaningful slowdown in consumer spending is underway," said Ray Stone of Stone & McCarthy Research Associates, a financial markets research firm in Princeton, N.J.
Meanwhile, the Labor Department said prices charged by producers for finished goods fell 0.1 percent, primarily because of a large 1.3 percent drop in passenger car prices and a 0.7 percent decline in prices of light trucks, which include popular sport-utility vehicles. Car prices had gone up 0.7 percent in May and light truck prices 0.8 percent.
Economist Gerald D. Cohen of Merrill Lynch & Co. in New York termed both of the reports "market-friendly." If other economic data coming out between now and the Federal Reserve's next policymaking meeting Aug. 24 "show a similar performance, the Fed can remain on hold at that time."
The central bank raised its target for overnight rates to 5 percent from 4.75 percent on June 30 in a "preemptive" move intended to slow economic growth modestly and keep inflation from increasing.
Even with retail sales up only 0.1 percent last month, to $243.3 billion, consumer purchases for the April-June period rose at an annual rate of 7.5 percent because of strong gains in earlier months. And with inflation extremely low, especially for goods, most of that increase represented a higher volume of purchases.
Gasoline station sales were held down by a 1.9 percent drop in prices at the pump, after a rise of more than a third over the previous three months. But food prices rose 0.4 percent as volatile fresh vegetable prices climbed 14.5 percent, which added to grocery store sales.
Over the past 12 months, finished goods prices, which are the prices charged by a producer when a completed item is first sold, were up 1.5 percent.
Some analysts expressed concern that while finished-goods prices showed little inflation pressure in the economy, separate indexes for crude materials, such as coal and oil, and for intermediate products -- lumber and components for industrial machinery, for example -- both rose for the fourth month in a row. These indexes often are referred to as indicators of the "inflation pipeline."
Dana Saporta, an analyst at Stone's firm, said, "These pipeline indexes bear watching, since continued increases in the months ahead would be a signal of building inflation pressures. Also, now that these indexes seem to have bottomed out, they could provide the Federal Reserve with some ammunition for [raising interest rates], which the Fed does not have in the finished-goods data."
Last December, the crude-materials price index was 16.7 percent lower than at the end of 1997, while the index for intermediate goods was 3.3 percent lower over the same period. By last month, the the year-over-year decline in intermediate-goods prices had shrunk to 0.5 percent, and the drop in crude-materials was down to only 0.4 percent.
However, often in the past neither increases nor declines in the crude- and intermediate-product indexes has had a significant impact on finished goods prices, because other costs, particularly for labor, represent a much greater share of total costs for producers.
Maury N. Harris, chief economist at PaineWebber Inc. in New York, said the "soft" retail sales report for last month could be the first of a string. Earlier this year unusually larger federal personal income tax refunds and low mortgage interest rates were both stimulating consumer spending. Low mortgage rates did so by encouraging refinancing of existing mortgages, which reduces monthly payments and may allow owners to take out some of their equity and spend it. At the same time, low mortgage rates boosted purchases of both new and existing homes, which increases demand for furniture, appliances, carpets and other furnishings.
With the surge in tax refunds waning and mortgage rates up substantially, "upcoming retail sales for the second half of the year should post just moderate gains," Harris said.
To Harris's list, Stone would add the fact the employment gains in recent months are down compared with the levels of last year and the first quarter of this year. Smaller increases in the number of jobs means smaller increases in household income.
CAPTION: Keeping Its Cool (This chart was not available)
CAPTION: Slight Moderation