Retail sales increase mostly due to higher gas prices.  The Census Bureau reported that retail sales and food services increased 0.5 percent (seasonally adjusted) in May and April’s initially reported decline of 0.4 percent was revised upward to a decline of 0.2 percent.  While there was moderate growth in sales of motor vehicles and parts (+0.5 percent), building equipment and garden supply (+1.3 percent), and health care products and services (+0.7 percent), the outsized share of growth came from gasoline store sales, which grew 3.6 percent in May and comprised more than 60 percent of the month’s sales increase (See Chart).  Unlike other surveys of economic activity, the retail sales report does not adjust for price changes, so large sales fluctuations can sometimes be traced back to significant changes in prices.  As is usually the case during the early summer months, gasoline prices increase with rising oil prices.  The regular grade gasoline price (including taxes) increased from $2.05 at the end of April to $2.44 per gallon at the end of May and is forecasted to average $2.67 per gallon in July.  Given that prices increased much more dramatically than did gasoline supplied (consumed), a consumer-led recovery may be hindered by consumers’ reduced discretionary spending once gasoline bills are paid.

Fed Beige Book signals lingering weakness and downward price pressures.  The Federal Reserve’s Beige Book, which relates anecdotal evidence about the state of the economy in the 12 Federal Reserve districts across the nation, showed that “economic conditions remained weak or deteriorated further during the period.”  The report described conditions during the period between mid-April and the end of May and echoed the statistical releases that have shown declining manufacturing activity and high unemployment.  Prices across all stages of production were “generally flat or falling” (oil and gasoline being the notable exception), fueling expectations that there will be very little inflation over the next year.  Consumer price data over the previous 6 months shows moderated inflationary pressures, well below the levels seen prior to the start of the recession.  Policy decisions at next week’s Federal Open Market Committee meeting will showcase how the members view price pressures in the context of the current economic situation.

High inventory levels reflect slack consumer demand.  Two surveys of inventory accumulation showed that manufacturers and wholesalers continue to reduce their stocks of goods in response to the recession.  The Census Bureau’s review of wholesale and business (retail) inventories indicated that their value declined again in April; this was the 8th straight month of declines for wholesalers while it was the 9th straight month for retailers.  However, the ratio of inventories to sales reported in both surveys remained elevated.  Retailers had about one-and-a-half times as much inventories as sales (ratio=1.54), slightly above the levels seen just before the recession.  Wholesalers’ ratio was 1.31, significantly higher than the previous April’s 1.12.  These data do not suggest that either wholesalers or retailers have strong incentives to build inventory levels, which would increase aggregate demand.