US Inflation Rate and Retail Sales Weakening: Effect on Interest Rates?

• June 17, 2017
• By Pete Nisbet
• 0

The weakening US inflation rate interested many people more than the Fed’s quarter percent increase in the interest rate. In fact, the low inflation rate had more effect on the markets than the minimal interest rate increase.  So why did the Fed increase the interest rate?

Quite frankly, it will make little difference to the finances of most people. Consumer budgets will be largely unaffected or affect very minimally. 0.25% is 25 cents for each $100. However, any rate hike sends a message – and this message is that the Federal Reserve believes that the US economy is doing OK.

US Inflation Rate Higher or Unemployment Rate Low?

Any interest rate increase by the Federal Reserve occurs for two major reasons.  Either the unemployment rate is running low or inflation is higher than normal. The US inflation rate was 1.9% for the year ending May 2017. Take this in relation to the Fed’s target of 2%, and it’s not far off. So inflation is not higher than expected.  However, the rate of unemployment is currently running lower than normal at just 4.3%. It was 4.9% in January.

Retail sales figures for May are not as good as hoped for.  This is likely one of the major factors involved in the decision of the Federal Reserve to apply a minimal interest rate hike. The US economy is not particularly strong, with lower than hoped for inflation figures and poor retail sales.

Although the annual US inflation rate to May was 1.9%, the month on month rate for February 2017 was 0.31% and for March was 0.08%. So inflation appears to be decreasing.

Why the Interest Rate Hike?

Taking it on an annual basis, US inflation rates look OK, but on a month to month basis it is decreasing.  So why the rate hike? Must be employment figures.  Many investors believe that there will be a third interest rate increase this year, at the FOMC December meeting.

However, this is by no means definite.  In fact, falling oil prices due to the ongoing glut of crude stocks is a negative indicator for interest rate hikes. Falling energy prices indicate that any rate hike in December is 50/50 at best.

World Economy Unstable

The world’s economies are anything but stable at the moment.

• Oil prices are falling, partially due to the US insistence on continuing shale oil production.
• The UK Brexit situation with the EU makes for instability in that area.
• The Greek debt package is under consideration in the EU.
• China’s economy is rising as is its manufacturing competition with the West

. . . and others. These have all led to instability throughout Europe and North America.

US Inflation and Retail Rates are undoubtedly weakening, and the UK economy is tied up in Brexit.  The effect on interest rates of these various factors are unlikely to be the worst of out troubles in the months and years to come.