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By Jason Stipp and Robert Johnson, CFA | 06-13-2012 11:30 AM

Tamer Inflation Softens Retail Sales

Retail sales are softening modestly year over year, but lower gas and drug prices should have upside for consumers' spending power, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar. We got the government report on retail sales this week. It showed a second monthly decline.

This is obviously a report we watch very closely--the consumer being a very important part of our economy.

Here with me to dig into the details and give his read on the report is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: So, we saw a decline, 0.2%. This was somewhat expected, though. What was your initial read on the report and the decline we did see?

Johnson: Everybody was looking for a decline, because this report, as we've said many times, is not adjusted for the effects of inflation. The price of gasoline has fallen dramatically for 10 weeks in a row here, and that means the sales at the gasoline stations were certainly an impediment to the overall report, and that's why everybody was looking for kind of a down number.

People thought the auto number might be a little softer, too, given that the new car sales were down last month a little bit, month-to-month, but on the other hand used car sales went up, so that was actually more of a help than people thought.

Stipp: So, it's important to think about the fact that prices being lower will affect this report, because people are spending less dollars when they are buying gasoline at the pump.

Gasoline, though, wasn't the only place where we saw some declines; we also saw drugstores declining. What was the story there?

Johnson: It's very interesting how it creeps into the system, but right now what's happening in terms of drugstore sales is that we've seen Lipitor come off-patent. I think Plavix either is or is about to come off patent, according to our analyst Matt Coffina, and so you've got a lot of those drugs coming off of patent and going to generics, and that absolutely kills the sales of drugstores.

I think one major chain might have mentioned that it was as much as a 2.5% hit to their sales growth rate just from one drug going off patent and going generic.

Stipp: So, it hurt those revenues for drugstores, but consumers probably like seeing those generics on the market.

Johnson: You're darn right they do, and it really helps control the prices.

Stipp: Another area where we saw decline is building materials. Now we had seen some traction in the housing market; why are we seeing building materials sales decline?

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