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STRONG RETAIL SALES ARE OFFSET BY SUDDEN SURGE IN INFLATION

Retailers racked up strong sales in May, the latest evidence the economy is coming out of recession, but in a worrying sign for policymakers, the government also reported a spurt in inflation at the wholesale level last month.

At the same time, new applications for unemployment insurance benefits fell by 38,000 to a seasonally adjusted 401,000 in the week ended May 25, the Labor Department reports. Jobless claims figures have been closely watched as a clue to whether companies are hiring once again.The Commerce Department said sales at the retail level rose a strong 1.0 percent in May, with demand picking up for a broad range of goods.

The sales figures provide the latest evidence that the economy is climbing out of the recession that began last July. It was a bigger sales gain than forecast by Wall Street economists, who had expected a 0.6 percent May rise.

But in a more worrying sign, the government said that prices at the wholesale level jumped 0.6 percent, the biggest increase since a 1.2 percent rise last October.

A sharp rise in energy prices was largely responsible for the increase. Energy costs spurted 2.4 percent in May after retreating during the previous five months.

The May rise in the Producer Price Index brings the wholesale inflation rate for the past 12 months to 3.4 percent, compared with a 5.7 percent rate in all of 1990.

But even after subtracting often-volatile food and energy costs, the "core rate" of inflation rose at a moderately fast clip of 0.4 percent in May, against a 0.2 percent rise in April, the department said.

But economists both in and out of government said the inflation surge was probably a one-time event.

White House economist Michael Boskin said the sharp rise was due to "one-time events" that will not push up inflation for the year.

Boskin, chairman of the White House's Council of Economic Advisers, said he expects annual inflation to be in the 3 percent to 4 percent range, significantly lower than last year's rate.

Other experts agreed.