US Import Decline Could Keep Fed from Raising Interest Rates

151204_INV_InterestRatesAs petroleum prices fell in the US last month, foreign import prices followed suit. This is an historic sign of the way low oil prices weigh on inflation.

The good news, perhaps, is that this decrease from prices a year ago was still only the smallest since October of 2014; and its not like prices have been massively high this year to begin with.

For example, Barclays economist Blerina Uruci notes, “In spite of the month-to-month volatility, we view the underlying trend in imported deflation as improving and consistent with a gradual waning of the drag from the stronger dollar and lower global commodity prices.”
Uruci goes on to say that economists do, in fact, expect imported inflation to improve and this will, in turn, help to stabilize the market for domestic core goods over the next few months.

America continues to import deflation out of Asia an Mexico, with the cost of goods imported from Japan, Mexico, and China, for example, falling 0.2 percent in August. But prices for Chinese imports has increased in a monthly report since December.
The decrease in August was strongly led, actually, by a fall in the price of imported communications equipment as well as declines in goods imported from Canada , the EU, and Mexico.

Overall prices for imported capital goods were unchanged last month, while the cost of imported automobiles fell 0.2 percent. Imported consumer goods prices—not including automobiles—declined about 0.1 percent, while the cost of imported food fell a remarkable 0.5 percent last month.
The report also indicated that export prices fell about 0.8 percent in August, marking the biggest such drop since January of this year. Furthermore, this is following a 0.2 percent increase from the month before. Overall, though, export prices fell 2.4 percent from the same time one year ago.

And with all that in mind, this week’s Labor Department report suggests that near term inflation would continue mostly unnoticeable, with strength garnering in favor of the Fed keeping interest rates steady through next week. This is in spite of the Fed’s desire to raise rates sooner, of course.

Accordingly, Wells Fargo Securities senior economist Sam Bullard, notes, “Most Fed officials expect the gradual climb toward the inflation target to remain intact and the diminishing drag from import price deflation will help, but it’s going to take time. We expect the Fed to remain cautious, leaving rates unchanged next week.”

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