INDICATOR: July Import and Export Prices

KEY DATA: Imports: Down 0.6%; Non-Energy Imports: Down 0.4%; Exports: Up 0.5%; Farm Exports: Up 6.4%

IN A NUTSHELL: “The decline in import costs will allow consumers and the Federal Reserve to breathe a little easier, at least for a little while.”

WHAT IT MEANS: With wages and salaries going nowhere, the last thing households need is for prices to rise. Thankfully, at least when it comes to the costs of imported goods, that did not happen in July.

Indeed, the prices of foreign products tanked, which was quite a surprise. The biggest drop was in food costs, a trend that is not likely to continue. Just look at the huge increase in farm export prices and you see a jump is coming. Can you say drought?

There was also a decline in industrial supplies, capital goods and even consumer costs, so this was a very broadly based drop.

The strangest number in the report was crude. According to the Bureau of Labor Statistics, crude prices declined. Huh? Expect a sharp rebound when we get the August numbers.

On the export side, it is clear that the problems in the farm belt are already being reflected in export prices. The prices of grains, cereals and seeds skyrocketed. This year, there will be huge losses for some farmers, but those outside the drought zone will see incomes soar.

In contrast, non-agricultural export prices were down pretty much across the board.

MARKETS AND FED POLICY IMPLICATIONS: Import price declines are always nice to see, but this was likely just a temporary respite, at least when it comes to food and energy. Those costs are likely to start rising again given what has been happening in the markets and the enormous loss of crops that is lowering supplies dramatically.

In most markets (I am not so sure about oil) supply and demand rules. On the other hand, with European growth faltering further and China probably decelerating sharply (no matter what the published data claim), international firms will be loathe to raise prices for fear of losing sales in the United States. Thus, I don’t expect non-food and fuel import prices to increase a whole lot.

Federal Reserve Chairman Ben Bernanke has correctly shifted discussion to top-line (including everything) inflation rather than core lately, but don’t be surprised if that changes and the he moves back toward focusing on prices excluding food and energy. That way the Chairman can keep saying that inflation is well contained.

Still, I don’t expect another round of quantitative easing, as the markets need to be weaned off Fed’s liquidity drugs sometime. Prices need to rise because of old-fashioned reasons such as earnings, not because the liquidity that is not going into the real economy, which is most of the easing, is being employed in the financial markets instead.

I might agree with the policy if there was a wealth effect from the higher equity prices, but I have not seen much argument that the impact is even measureable let alone large.