INDICATOR: May Import and Export Prices
KEY DATA: Imports: -0.6%; Non-Fuel: -0.3%; Exports: -0.5%; Farm: +1.0%
IN A NUTSHELL: “It’s hard to see where inflation will come from with import prices continuing to fall.”
WHAT IT MEANS: The latest word du jour is “taper”, the idea that the Fed will start slowly ending its massive liquidity binge. Some members want to do it as soon as possible, like yesterday. They have great concern about inflation. Well, inflation may become an issue, but not anytime soon. Import prices dropped in May led by another large decline in fuel. However, it wasn’t all an energy play. Excluding this component, prices were down for the third consecutive month. And, the declines were widespread. Negative numbers were posted for consumer goods, vehicles, industrial materials and supplies. The cost for capital goods was flat. Only imported for prices rose. On the export side, farmers were just about the only ones who managed to raise their prices.
MARKETS AND FED POLICY IMPLICATIONS: I have been making the case that high inflation is just not as much a possibility now or in the future than it was in the past. We are operating in an open, world economy where foreign products play a critical role in determining pricing power. Import prices are currently weak and as long as the U.S. remains the market of not just first but also last resort for so many companies around the world, there is little reason to think that non-energy import costs will surge. Will there be a jump in consumer and business demand due to a sudden sharp rise in lending? Only if you think banks are going to suddenly find a ton of “good loans” where there were few to start with. And finally, does anyone think that labor compensation is going to increase rapidly anytime soon? Those at the Fed who are focused on the economy more than inflation likely believe that whatever price pressures that may result from staying the course and not tapering too soon can be handled by the programs already in place that can drain liquidity at a decent pace without putting too much pressure on interest rates. But even if interest rates jump, well that only means the recovery will be restrained, further limiting the inflation pressures. So instead of simply saying the liquidity creates inflation, it would be nice to trace the mechanisms that translate liquidity into excessive economic growth and therefore higher-than-desired inflation rates. If that is done, I suspect the fears will be reduced. Until the inflation hawks provide that economic logic, I will remain unconvinced that inflation is so great a potential problem that the Fed should risk tightening too soon.