Consumers went on a tear last month, driving up retail sales by 1.4 percent — in the latest sign that economic growth is rebounding robustly from a moribund first quarter — but inflation also posted a stunning comeback with a 16.5 percent annualized jump in import prices.
The increase in import prices since February reflected rapidly rising fuel costs and a weak dollar. Though the intensified inflation pressures are feeding sharply higher interest rates that have roiled stocks on Wall Street for days, markets chose to celebrate yesterday’s raft of good economic news, with the Dow Jones Industrial Average gaining 187 points.
In their best performance since January 2006, consumers lavished spending on nearly everything during May, from clothing and sporting goods to electronics, cars, and home and garden supplies, the Commerce Department reported. Even outside of a 3.8 percent jump in gasoline purchases that was driven by record-high prices before Memorial Day, spending soared by 1.2 percent.
“It was an unequivocally strong report,” after a decline of 0.1 percent in retail sales during April, said Harm Bandholz, economist with Unicredit Markets. “It confirms that the weakness in April was the result of bad weather conditions rather than the beginning of a severe consumer slowdown.”
When added together with other recent reports showing strong gains in exports and a solid 0.4 percent rise in restocking of depleted inventories by businesses in April, the retail sales report prompted many economists to raise their estimates for growth in the second quarter to as high as 4 percent from the dismal 0.6 percent showing in the first quarter.
While that is good news for the economy and financial markets, the spring rebound in growth also brought a surge in prices, led by a rapid rise in the price of imported oil and gasoline since February, according to a Labor Department report.
That will keep the Federal Reserve on guard and maintain pressure on long-term interest rates, which have risen nearly three-quarters of a percentage point since March on a worldwide acceleration in growth and inflation.
Economists are expecting a big 0.8 percent jump in consumer prices in a report out tomorrow, reflecting a peak of $3.23 a gallon in average regular gas prices during May. The Fed often screens out the fluctuations in food and energy prices and focuses on the so-called “core” rate of inflation, which is running slightly above 2 percent, but for consumers the rise in fuel and food costs has been relentless and unavoidable.
The Fed’s staff in a report yesterday said it did not detect an uptick in inflation in the last six weeks, noting that overall price and wage pressures did not rise despite an increase in hiring and substantially higher costs for fuel, food and other commodities.
“Modest” or “moderate” was the way most of the Fed’s 12 reserve banks described price pressures in their districts, the same adjectives they used to describe the pace of economic growth. The Fed staff did detect a pickup in consumer spending and retail sales in late April and early May, and noted that “travel and tourism remained healthy despite the recent rise in gas prices.”
Richard Berner, economist with Morgan Stanley, said that while the prospects for growth and inflation have risen, recent reports mostly reflect a rebound from the unusually depressed first quarter. High gas prices and a slumping housing market will continue to restrain growth this year after it revives at a 4 percent pace in the spring quarter, he said.
The sharply higher rates on Treasury bonds and long-term mortgages will act to further restrain growth, he said, particularly in housing where higher rates pose yet another obstacle to recovery.
“Housing head winds still loom,” and “the jump in gasoline prices further menaces consumer discretionary spending power,” Mr. Berner said. Even if gas prices decline some on average this month, the jump in fuel costs since December will have cost consumers about $80 billion in lost purchasing power, he said.
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