January Import and Export Prices
Economics in a nutshell: “If you want to know why some at the Fed worry more about too low inflation rather than future high inflation, the sharp declines in import prices is a very good place to start.”
INDICATOR: January Import and Export Prices
KEY DATA: Imports: -2.8%; Nonfuel: -0.7%; Fuel: -16.9%/ Exports: -2%; Farm: -1.2%
IN A NUTSHELL: "If you want to know why some at the Fed worry more about too low inflation rather than future high inflation, the sharp declines in import prices is a very good place to start."
WHAT IT MEANS: The battle at the Fed, in the business commentary community and between economists is whether inflation is something to worry about. If it isn't, then rates can be kept low longer. If inflation might accelerate sharply, then the Fed needs to do something sooner than the markets expect. Well, when it comes to imports, price increases are hardly an issue. Indeed, for the seventh consecutive month, import costs declined, with fuel leading the way. But even excluding energy, prices have dropped for five straight months. A skyrocketing dollar has allowed foreign producers to lower their costs and hopefully expand their sales. The breadth of the declines was breathtaking. Every major category was in the red in January, including consumer and capital goods, industrial supplies, food and vehicles. Since January 2014, only food has a positive change in prices. In other words, imports continue to play a major part in keeping inflation well in check. On the export side, prices U.S. companies are receiving is also falling, but at a more moderate pace. But even here, costs are on the decline pretty much across the board.
MARKETS AND FED POLICY IMPLICATIONS: Right now, inflation is hardly something to worry about. But for the Fed, it is not about "right now". It is about the next year. The likelihood that fuel costs will drop another forty percent is pretty slim. It is also no likely the double-digit rise in the value of the dollar over the past year will be repeated, though further increases are possible. So the two current driving forces for import price declines should dissipate. But that is a "should". Some will argue that until conditions change, it is better to worry about disinflation rather than inflation and that would mean don't raise rates. Those on the other side will point to further tightening in the labor market and say within the next year, we could be looking at rising energy costs, a falling dollar, rising import prices and surging wages. In other words, the debate is on. As for the markets, investors might consider this a reason for the Fed to stay put and we know that most don't want to see rates rise. Ultimately, the Fed's decisions on when to start tightening will come down to wage inflation. The strength of the economy is central to that discussion, so this report may only reinforce current beliefs – and differences of opinion.
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