Retail sales post weak gain in May, inflation shows slow increase

WASHINGTON -- Consumers, battered by surging gasoline prices and rising interest rates, cut back sharply on their spending in May, providing further evidence suggesting the economy is slowing.

It is still an open question whether the slowdown is coming soon enough to keep inflation under control.

The Labor Department reported Tuesday that wholesale prices rose by just 0.2 percent in May, a big drop from the past two months. But core inflation, excluding food and energy, showed an increase of 0.3 percent, faster than analysts had expected.

The Commerce Department reported that retail sales edged up only 0.1 percent last month and would have been in negative territory had it not been for a big rise in the price of gasoline.

Inflation worries coupled with signs of a weakening economy meant another bad day on Wall Street.

The Dow Jones industrial average fell 86.44 points to close at 10,706.14, erasing the last of the Dow's gains for this year.

Fears that higher inflation will trigger further interest rate increases from the Federal Reserve and contribute to a sharper U.S. economic slowdown are not only depressing American investors but have contributed to a global stock selloff in recent days.

Without the higher payout at gas stations, retail sales would have fallen 0.1 percent last month. The declines were widespread with sales falling at auto dealerships, furniture stores and hardware stores. Sales at department stores and specialty clothing stores posted modest increases.

Analysts said that consumers, who have been the driving force in the four-year-old economic expansion, are beginning to flag in their shopping zeal under an array of adverse forces.

"With employment growth slowing, interest rates rising, stock prices falling, housing markets cooling and energy prices still elevated, there is much weighing on the minds of consumers," said Michael Gregory, an economist at BMO Nesbitt Burns, a Toronto investment bank.

Consumer spending, which accounts for two-thirds of total economic activity, helped power the economy to growth of 5.3 percent in the first three months of the year. Analysts believe that economic growth will slow to around 3 percent in the current quarter, reflecting a weaker consumer sector.

"The persistence of high gasoline prices, coupled with lower equity prices and badly bruised consumer sentiment, will effectively take the wind out of the sales of real consumer spending in the second quarter," said Brian Bethune, U.S. economist at Global Insight, a private forecasting firm.

The tiny 0.1 percent rise in May retail sales was held back by a 1.6 percent drop in auto sales, weakness that has caused automakers to bring back incentive offers this month.

The small 0.2 percent increase in wholesale inflation was the best performance since a 1.3 percent drop in February. Food prices actually fell by 0.5 percent and energy costs, which had jumped by 4 percent in April, slowed to a much smaller 0.4 percent rise in May.

But outside food and energy, price pressures mounted, with the 0.3 percent increase in core inflation coming after two moderate gains of 0.1 percent in March and April.

While this could raise concerns at the Federal Reserve, analysts said the more important inflation figure will be consumer prices for May, which will be released Wednesday.

In advance of that report, economists were looking for overall prices to be up 0.4 percent, slower than the 0.6 percent jump in April, and core consumer prices to show a modest 0.2 percent increase, down from a 0.3 percent rise in April.

Federal Reserve Chairman Ben Bernanke contributed to a 199-point drop in the Dow Jones industrial average on June 5 when he called recent increases in inflation "unwelcome" developments, sending a signal the central bank could boost rates for a 17th time at the June 28-29 meeting.