• INDICATOR: December Import and Export Prices and Weekly Jobless Claims
• KEY DATA: Imports: -1.2%; Nonfuel: -0.3%; Exports: -1.1%; Farm: -1%/ Claims: +7,000
• IN A NUTSHELL:  “Falling energy costs and the rising dollar are combining to keep the prices of imported goods and overall inflation down.”

 
WHAT IT MEANS:  So much for inflation.  The cost of imported goods fell again and declined even when fuel was excluded.  Indeed, the nonfuel index has been either flat or down for the past seventeen months.  Searching the details, it was hard to find any major or even sub-category that was up.  Fish and beverages were about it.  Since December 2014, nonfuel import prices have dropped 3.4%, while fuel is off a whopping 40.5%. 
 
On the labor market front, unemployment claims rose last week, but the government has had trouble seasonably adjusting the weekly data early in the year.  Regardless, the level, especially when using the smoothed, 4-week moving average, is still quite low, pointing to further tightening in the market.
 
MARKETS AND FED POLICY IMPLICATIONS: I guess if you do things long enough, you get to see just about everything.  That is the case with inflation.  It is amazing that I am sitting here writing about inflation being too low in the United States.  But there it is.  Clearly, part of the problem is the war going on in the energy sector, where the Saudi’s are trying to drive out U.S. competitors by keeping the production tap wide open and prices way down.  That has not worked particularly well for the producers, but it has saved consumers hundreds of billions of dollars.  That money is being used to bolster household and business balance sheets and is adding to demand for all types of products. 

But it has also caused energy-related companies to slash spending on just about everything.  The net result has been lower prices and slower growth. The teensy weensy step the Fed took to raise rates, coupled with the U.S. economy being the strongest in the industrialized world, have led to a rising dollar that is also keeping prices down.  That would not be a worry unless the price declines become entrenched in the system and inflation expectations fall.  Reasonably well-anchored expectations have been the Fed’s security blanket, so any movement downward on perceptions would create concerns. 

A couple of months ago, before the latest down draft in oil prices, I commented that the inflation rate could move back toward the Fed’s target early this year.  I was expecting oil prices to slowly filter upward, not crash and burn.  That is likely what many Fed members projected as well.  But now we have to wonder when energy prices will turn up.  Until they do, the Fed will not have the comfort of accelerating inflation to go along with a tightening labor market.  That could cause the members to become even more cautious.  I still have a March hike in my forecast, but further declines in prices could push back the next increase.    

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.