KEY DATA: Imports: +0.4%; Nonfuel: -0.2%; Exports: +0.1%; Farm: -0.1%/ Confidence: -2.8 points
IN A NUTSHELL: “The strong dollar is keeping everything but energy costs under control.”
WHAT IT MEANS: Import prices jumped again in January, propelled by energy. Energy prices surged by nearly 6%, after having jumped by even more in December. Over the year, the cost of imported fuel is up a whopping 58%. In January 2016, fuel costs were down nearly 40% from the previous year. So it is no wonder that overall import prices are up nearly 4% from the previous year. In just one year, the headline number has gone from a yearly change of -6.5% to a rise of 3.7%, a greater than ten percentage points swing. As for the details, imported food prices dropped sharply, though my Mexican avocados seemed to cost more. Has a border tax been implemented already? Consumer and capital goods prices eased a touch, while automotive import prices dropped sharply. In other words, there aren’t any broad-based inflationary pressures coming from the import sector. As for exports, the two-month rise in farm product prices was halted in January, but the drop was modest. Consumer export prices fell sharply and capital goods exports costs were off modestly, but vehicle makers did see a sharp rise in their prices.
The surge in consumer confidence since the election faded a touch in early February. The University of Michigan’s Consumer Sentiment Index dropped, led by a solid decline in expectations. Still, the level remains quite high. Both positive and negative reactions to the Trump actions are major factors in respondents’ attitudes and they are split pretty much down the middle between positive and negative. As I have said many times, changes in confidence driven by political factors rarely have sustained impacts on spending, so let’s wait a while before we make any judgment on how the rise – or any subsequent fall if it happens – will play out in the marketplace.
MARKETS AND FED POLICY IMPLICATIONS: Import costs, which had restrained inflation, are now rising. Should the Fed be worried about this? Yes and no. The increases are not widespread, so we cannot assume that we will be seeing consumer inflation surge. But the Fed shifted to headline inflation from core and energy is driving up that rate. Don’t be surprised if inflation tops the Fed’s 2% target in the new few months. That would mean the Fed has met both its inflation and unemployment targets, so there would be little to stop it from raising rates – if it wants to and follows its own guidelines. Still, even if inflation tops 2% before the March 14-15 FOMC meeting, the Committee is not likely to raise rates then. They will want to see what the tax cut plan, which is supposed to be “phenomenal”, looks like. (Someone should take the thesaurus away from the White House.) I have the next increase in April, which is a non-press conference meeting. I think Chair Yellen wants to prove that all meetings are live and raising rates then, especially if it comes after a major tax cut proposal, would be the easiest time to make that point.