Will cooling prices keep consumer spending hot?
(MoneyWatch) The U.S. economy's hard-scrabble recovery got a much needed dose of good news today. Retail sales rose in July, while fuel costs and the price of imported goods fell. The question now is whether falling prices will be enough to keep nervous consumers spending.
The Commerce Department reported U.S. retail sales rose 0.8 percent in July from the month before. This is the largest increase in five months and followed three months of declines, including a 0.7 percent drop in sales in June.
Consumers going to the stores last month generally found lower prices thanks to decreases in the cost of fuel, food and industrial supplies. Energy prices fell 0.4 percent last month, the fifth straight month of declining prices. Wholesale gasoline prices fell 3.1 percent in July. The fall in energy prices and other input prices means companies now have more money to spend on other things, such as equipment and hiring.
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The drop in energy and industrial goods was the main reason for the lower prices on goods imported into the U.S. These were down 0.6 percent in July from the month before, according to the Labor Department. It was the fourth consecutive monthly decline. Compared with a year earlier, import prices were down 3.2 percent in July, the largest annual drop since October 2009. This was especially good news because from July 2010 to July 2011 import prices had risen 13.7 percent.
A drop in import costs generally means lower consumer prices in the months ahead. Despite this, there will be increased costs for some items as producer prices rose in July at the fastest pace in five months. The Labor Department's Producer Price Index climbed 0.3 percent last month, primarily due to higher costs for light trucks, pharmaceutical drugs and cigarettes. Light trucks were up 1.6 percent and pharmaceuticals up 0.9 percent.
Unfortunately consumers can also expect to see higher food prices because of the drought that has slammed farms across the nation.
All major retail categories showed increases in sales, a sign that consumers may be gaining confidence after the longest stretch of declines since the fall of 2008. Consumer spending drives roughly 70 percent of economic activity, so there's won't be a recovery unless consumers keep spending.
