Investors were still expecting the Federal Open Markets Committee to increase USA overnight interest rates later on Wednesday at the conclusion of its June policy meeting.
The Commerce Department said retail sales fell 0.3 per cent last month amid declining purchases of motor vehicles and discretionary spending after an unrevised 0.4 per cent increase in April.
Retail sales rose 3.8 percent in May on a year-on-year basis. Some of the drop in monthly retail sales reflected lower gasoline prices, which weighed on receipts at service stations.
The so-called core CPI, which strips out food and energy costs, edged up 0.1 percent last month after a similar gain in April.
June 14 The dollar index on Wednesday fell to its lowest since November 9 against a basket of major currencies that measure its strength after the release of weaker-than-expected U.S. CPI and retail sales data.
"From out of nowhere we have now had three months of unusual weakness in underlying prices", said Paul Ashworth, chief economist at Capital Economics. These included apparel, airline fares, medical care services and communication.
It was the second drop in the CPI in three months. In addition, a smaller drawdown than expected in crude oil inventories is dropping oil stocks 1-4 percent.
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The headline CPI for the 12-months through May fell below the Fed's two percent target to 1.9 percent last month, continuing a steady decline since February.
While the U.S. central bank is expected to raise interest rates by 25 basis points on Wednesday, the second hike this year, the weakness in inflation and retail sales, if sustained, could put further monetary tightening in jeopardy.
Clothing, housing, fuel and light also saw lower inflation rate in May while prices of vegetables declined by 13.44 per cent and that of pulses and products by 19.45 per cent. United States stock index futures pared gains. May's decline was the largest since January 2016 and confounded economists' expectation for a 0.1 percent gain. Over the past 12 months, food costs are up just 0.9 per cent while energy prices have risen 5.4 per cent. Gas station sales were down 2.4 percent month-over-month, but electronics/appliances were also down 2.8 percent after rising 2.2 percent in April.
For now, Fed officials don't appear overly concerned with the recent downward path, attributing it at least in part to one-time drops in prices for things like wireless telephone services and prescription drugs.
The Fed on Wednesday increased borrowing costs for the second time this year, while acknowledging the recent moderation in inflation pressures.
Retail sales were still down 0.3 per cent even after excluding the more volatile food and cars categories, the first decline for the core measure since August. That has led some retailers, including Macy's M.N , Sears SHLD.O and Abercrombie & Fitch ANF.N to announce shop closures. Analysts were expecting a 0.1% rise, while April's figure showed a 0.4% growth.