This data comes ahead of the end of the Fed's two-day meeting on Wednesday, after which it's expected to announce a hike in interest rates. "It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
The Atlanta Fed is forecasting the economy growing at a 3.0 percent annualized rate in the second quarter, but this estimate could be trimmed following the weak core retail sales.
Americans cut spending at petrol stations, department stores and electronics shops in May as retail sales registered their biggest drop in 16 months, a cautionary sign for the economy.
Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged last month after an upwardly revised 0.6 percent rise in April.
While the markets do not appear to be reacting to the awful attack in Alexandria, it does appear to be reacting modestly to this morning's disappointing May retail sales and Consumer Price Index (CPI) report.
"From out of nowhere we have now had three months of unusual weakness in underlying prices", said Paul Ashworth, chief economist at Capital Economics.
Output increased at a 2.1 percent pace in the October-December period. The Atlanta Fed is forecasting GDP rising at a 3.0 per cent annualised rate in the second quarter.
The monthly core CPI was restrained by decreases in the prices of apparel, airline fares, communication and medical care services. The core CPI increased 1.7 percent year-on-year, the smallest rise since May 2015, after advancing 1.9 percent in April. The CPI rose 2.2 per cent in the 12 months through April.
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.
What happened? It appears that a number of factors were involved: rents were lower than expected, along with consumer goods prices. U.S. stock index futures pared gains.
Amazon and other other nonstore sales rose a hefty 10.2% vs. a year earlier, though that was a touch slower than April's 11.4% year-over-year increase.
"Unemployment remains at a multi-decade low of 4.6%, but wage growth for the three months to April undershot economists' forecasts, meaning the squeeze on household finances is worse than previously thought".
A stripped-down measure of inflation that excludes the volatile food and energy categories rose 0.1% in May.
Bond yields dropped to their lows for the year on the CPI report and have been weighing on banks all morning, which are down 1-2 percent. Gasoline prices also dropped 6.4 percent.
The cost of food, however, increased for the fifth straight month.
Retail sales - reflecting spending at stores, restaurants and websites - fell 0.3% in May, the biggest decline since January 2016, the Commerce Department said.