• INDICATOR: March Import and Export Prices
• KEY DATA: Imports: +0.2%; Excluding Fuel: -0.1%; Exports: 0%; Farm: -2.5%
• IN A NUTSHELL:  “With most import prices still falling, the Fed retains a measure of flexibility in its policymaking, at least for a while.”

 

WHAT IT MEANS: The big thing keeping the Fed from raising rates is inflation.  Yes, the Chair and some members keep talking about world growth being a concern.  But with the economy pretty much at full employment, if the inflation target was being met or exceeded as well, it would be hard to see how the rate setting committee could do anything but raise rates.  So, will inflation accelerate to the Fed’s desired level of 2% in the next few months?  Not likely.  Import prices rose in March, the first increase since June 2015.  The uptick was largely due to a solid increase in fuel costs.  Excluding energy, prices were down a touch.  The cost of food and consumer and capital goods dropped, offsetting a modest increase in automotive products and industrial supplies.  On the export side, the hurting agricultural sector continues to bleed income, as prices keep falling.  Over the year, farm export prices have declined over 11%. 

MARKETS AND FED POLICY IMPLICATIONS: Inflation, as measured by the headline number, remains well below the Fed’s target and it should remain that way at least until the fall.  Energy prices soared last spring and we are likely to see the year-over-year numbers worsen in the next few months as a consequence.  Gasoline prices (all formulations) broke $2.90 last June and July and didn’t come down to $2.40 until October. 

My guess is that by September, the gasoline/energy price comparison might finally turn positive, at which point the headline number is likely to reach 2% or more.  Excluding energy, prices have been slowly, but steadily moving upward and that turtle-like pace should continue.  Limited increases, if not declines, in import prices should keep inflation under control.  That said, the dollar has stabilized and even declined against some currencies.  Over the next few months, if the currency firming holds, the fall in import prices should cease and we could see some minor increases.  Thus, the process of moving back toward the desired inflation rate will continue. 

For the Fed members who want to postpone the next move for as long as possible, today’s import price report provides some data to defend their stands.  As for investors, anything that implies the Fed is on hold seems to be good news, though we haven’t delinked from oil just yet.  Oil being above $40/barrel seems to be helping, though I will remain fascinated by the view of investors that energy companies matter more than consumers.   

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.