U.S. retail sales in May recorded their biggest drop in 16 months and consumer prices unexpectedly fell, suggesting a softening in domestic demand that could limit the Federal Reserve's ability to continue raising interest rates this year.
The Fed is expected to increase borrowing costs later on Wednesday, but the signs of moderate consumer spending and retreating inflation pressures could worry policymakers who have previously viewed the softness as transitory.
"It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
The Commerce Department said retail sales fell 0.3 percent last month amid declining purchases of motor vehicles and discretionary spending after an unrevised 0.4 percent increase in April. May's decline was the largest since January 2016 and confounded economists' expectations for a 0.1 percent gain.
Retail sales rose 3.8 percent in May on a year-on-year basis. While some of the drop in monthly retail sales reflected lower gasoline prices, which weighed on receipts at service stations, details of the report were generally weak.