March 01, 2016
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 flexibility in its policymaking, at least for a while."
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.