September Import and Export Prices

KEY DATA: Imports: -0.5%; Excluding Fuel: -0.1%; Exports: -0.2%; Farm: -0.9%

IN A NUTSHELL:   “With energy prices cratering and the dollar strengthening, it is not a surprise that import costs are on the way down.”

WHAT IT MEANS:  While the Fed watches the labor market for signs of potential inflation, the rest of us are also looking at what we pay at the stores and those costs are going nowhere.  Import prices fell in September for the third consecutive month, led by declines in all sources of fuels.  But it was not just energy that was down.  The cost of foreign agricultural food products, industrial supplies and vehicles were also off.  Indeed, except for some large increases in meat and fish, import prices were generally flat or down.  Since September 2013, overall import prices are down nearly one percent while nonfuel costs are up only 0.5%.  As for our exports, the agricultural sector to reel from declines in the prices.  Farmers are seeing their incomes slide but just about every other exporter is feeling their pain.

On the labor market front, yesterday we found out that new claims for unemployment insurance eased again. Adjusting for the size of the labor force, we are now at record lows.  Firms continue to hold on to workers and they are starting to pay up for new workers.  In a new report, a Workforce Vitality Index, ADP reported that wages gains for those who change jobs is beginning to soar even as “stayers’” incomes remain stagnant.  That is not a stable condition, as it will encourage more people to start looking around.

MARKETS AND FED POLICY IMPLICATIONS:  The Fed is worried about inflation, but unlike some of the hawks, many think the real threat is disinflation.  There is absolutely no inflationary pressure coming from imports.  With Europe slowing and the U.S. energy sector surging, fuel costs are dropping.  Add to that the firming dollar, which allows foreign firms to either lower prices of keep them stable, and you have a prescription for tame inflation.  That confounds the labor market situation.  If firms have to not only pay up for new workers but also start raising wages of current employees to retain them, they face a dilemma:  Do they keep prices down to compete with foreign firms or do they raise prices to pay for the labor cost increases?  The Fed has a target of 2% for inflation and that means inflation needs to rise.  After all these years of low interest rates, it is very hard for the Fed to expand the economy and limit deflationary pressures.  The members would probably welcome increased wage and ultimately price inflation.