Smith Faculty Opinion Article	July 19, 2006
By Dr. Peter Morici, Professor of International Business EMAIL WEB SITE

Retail Sales Decline in June More Evidence Growth Is Slowing and Stagflation Is a Threat

Today, the Commerce Department reported retail sales decreased 0.1 percent in June, while retail sales, less automobiles and parts, were up 0.3 percent.

Compared to a year ago, June retail sales were up 5.9 percent, and excluding automobiles and parts, retail sales were 8.5 percent higher.

In May, retail sales increased only 0.1 percent. Over the last two months, retail sales have been stagnant. Consumers are pulling back sharply, and the economy may be slowing much more than Fed policymakers have anticipated. The combination of rising gasoline prices and interest rates are doing much to slow down growth and push up inflation.

Higher gas prices, rising interest rates and a flagging housing market are dampening retail sales, and this is slowing business investment, commercial construction, jobs creation, and GDP growth. Inflationary pressures, other than those from international oil and resource markets, should ease soon. Core inflation should fall within Fed Chairman Ben Bernanke's comfort zone later this summer or fall.

Conditions in international oil markets will continue to push up broader measures of inflation, and Fed interest rate increases aimed at harnessing these inflationary pressures will not be effective.

Further interest rate hikes will only raise the likelihood of a distasteful bout with stagflation.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.