Import Prices: One Month Does Not A Trend Make, But...

By: Paul Kasriel | Sun, Jun 11, 2006
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Excluding fuels, U.S. import prices excluding fuels increased 0.7% in May after increases of only 0.1% in March and April. As shown in Chart 1, on a year-over-year basis, ex-fuel import prices were up 1.4% in May-- a sharp acceleration from April's 0.6% increase. Although one is always hesitant to draw conclusions from the observation of one data point, if this May datum truly does represent a trend reversal in import-price inflation, it could complicate the Fed's policy decisions going forward. A lot of our consumer goods are imported. If the price increases of these imported consumer goods are now accelerating, this will add to the faster core consumer inflation now being experienced, which, hitherto, had been primarily emanating from the core services component - everyone's favorite "owner's equivalent rent." If the Fed pauses after its credibility-enhancing June 29 rate hike and other major central banks continue raising rates, the dollar is likely to continue on its downward trend, which will exacerbate import price increases. I have always believed that "checkmate" for the Fed would be a weakening grossly-indebted U.S. economy and the inflationary impact of a sliding dollar. If the Fed ignores the dollar-induced inflation, the decline in the dollar accelerates. If the Fed raises rates in response to dollar-induced inflation, it brings down the U.S. house of credit cards. The May import price report might be the beginning of the end. And Bernanke thought the luckiest day of his life was being named Greenspan's successor!

Chart 1

High Price Of Oil Appears To Be Narrowing U.S. Trade Gap

Adjusted for prices, the U.S. trade deficit in goods troughed in January (see Chart 2). What is driving this recent narrowing in the trade gap? Primarily, petroleum. As shown in Chart 3, there has been a sharp narrowing in the U.S. price-adjusted trade deficit in petroleum products whereas the price-adjusted deficit in non-petroleum goods has continued to widen. Chart 4 shows that Katrina sharply curtailed U.S. exports petroleum products. Now that U.S. petroleum production is coming back on stream, so, exports of the products are rising again. More importantly, the higher price of petroleum products appears to be reducing the quantity demanded of imported petroleum products. I would expect that in the not too distant future the trade deficit of non-petroleum products also will start to narrow convincingly reflecting the sharp slowdown in U.S. consumer spending growth.

Chart 2

Chart 3

Chart 4

 


 

Paul Kasriel

Author: Paul Kasriel

Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

Paul Kasriel

Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.

Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.

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