Larry Kudlow, the economist and former adviser to President Ronald Reagan, said the two-month drop in retail sales is a bad sign for the economy as stocks reach record highs.

“I’m glad consumer prices are low, I’m not fine with monthly declines in retail sales,” Kudlow said on CNBC. Earlier in the day, the Labor Department said its Consumer Price Index was unchanged in June. Food prices were stable and rents were higher, but the cost of gasoline, mobile phones services, airline fares, apparel, household furnishings, new vehicles and used cars and trucks declined.

In a separate report, the Commerce Department said retail sales fell 0.2 percent last month, weighed down by declines at gas stations, clothing stores and supermarkets. Americans also cut back on restaurants, bars and hobbies.

The S&P 500 stock index climbed 0.5 percent to close at 2,459.27 as investors speculated the disappointing economic data would reduce the likelihood that the Federal Reserve would raise interest rates aggressively. The central bank has raised borrowing costs three times since December on signs that the labor market was still adding jobs.

Fed Chair Janet Yellen told Congress on Wednesday that the central bank expects to keep raising rates gradually while trimming its massive bond holdings this year. In her semiannual testimony on the economy, Yellen said strong job gains and rising household wealth should fuel growth over the next two years.

She blamed a recent slowdown in inflation on temporary factors, and said Fed officials are watching indicators closely to make sure that yearly price gains rise to the Fed's 2 percent target.

Today’s lackluster CPI report showed that deflationary pressures aren’t temporary, said Omair Sharif, a senior U.S. economist at Societe Generale.

“There is evidence of weakness in a substantial share of the core CPI that has to do with more than just the idiosyncratic, transitory factors that Chair Yellen has cited in recent weeks to explain the softness in core inflation,” he said in a July 14 report. “Of the 62 subcomponents in the core CPI that we follow, only 37 percent in June had an accelerating year-over-year rate, the lowest proportion since March 2014.”

The median forecast among Wall Street economists expects the Fed to hike rates one more time this year.