Tags: energy | costs | inflation | fuel | import | export

Rising Energy Costs Will Fuel Spike in Inflation

Rising Energy Costs Will Fuel Spike in Inflation

Thursday, 12 April 2018 09:57 AM Current | Bio | Archive

  • INDICATOR: March Import and Export Prices and Weekly Jobless Claims
  • KEY DATA: Imports: 0%; Non-Fuel: +0.2%; Exports: +0.3%; Farm: +3.4%/ Claims: +9,000
  • IN A NUTSHELL: “As long as energy costs keeps falling, inflation will remain contained, but we already know that is not the case.”

WHAT IT MEANS: When it comes to the economy, energy gives and takes away. When prices soar, the sector expands and while inflation accelerates, so does growth. But as we saw when prices collapsed, the sector contracts and the economy follows suit. Right now, prices are bouncing around, but in a fairly narrow range. Yesterday’s consumer price report indicated that retail costs went nowhere in March, helped largely by a drop in energy prices. The same was the case with import costs. A large decline in energy prices led to a flat import price index. Excluding fuels, the cost of foreign products continued to rise. But fuels are not the major problem. Food prices continue to soar and over the year, they are up over 4%. Thankfully, consumer and vehicle costs are largely going nowhere, so we don’t have much of problem in those categories. As for exports, the agricultural sector, which has been pummeled for much of the past year, finally caught a break as their products fetched much higher prices. The rest of the export sector, though, has had to make due with minimal price increases.

Jobless claims receded last week, but that was largely from a surprisingly high number the previous week. Claims are extremely low and they keep flashing the warning that the labor market is tightening.

MARKETS AND FED POLICY IMPLICATIONS: The one thing keeping the Fed form having to worry too much is the reasonable rate of price inflation. That said, it is slowly and steadily accelerating. Indeed, in yesterday’s March Consumer Price Index report, it was seen that inflation, on a year-over-year basis, rose faster than the Fed’s 2% target rate for both the headline and core numbers. As long as we don’t get into a trade war where tariffs are slapped on all sorts of things, the Fed, as it indicated in the minutes from the last FOMC meeting, should be able to maintain its slow tightening process. But tit-for-tat tariffs would raise prices and that would create real concerns at the Fed. With growth solid, a minor trade war would slow the economy modestly but raise inflation. So the Fed could be forced to raise interest rates faster. As for investors, today’s numbers probably will not make much of a difference, especially since we are starting earnings season. Good numbers, which are expected, should keep investors feeling good.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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As long as energy costs keeps falling, inflation will remain contained, but we already know that is not the case.
energy, costs, inflation, fuel, import, export
Thursday, 12 April 2018 09:57 AM
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