Import prices fell 0.6% in May from the prior month, the third straight decline, led by a 1.9% drop in fuel prices. Compared to a year ago, prices were down 1.9%, the eleventh month in the past twelve that prices have been lower than the prior year (see chart below). From a year ago, fuel prices were down 4.4%, thanks to a 6.2% drop in petroleum prices. The rise in the dollar since February, along with slowing growth in China and emerging markets, has helped to push oil prices moderately lower. Rising concerns about a pullback in Fed stimulus has led to a sharp decline in the dollar over the past few weeks, however, and this has pushed up oil prices in turn. Therefore, we could see a backup in petroleum prices when the June report comes out.
Still, the continued downtrend in overall import prices is helping to keep inflation in check, which is good for consumers, fixed income investors and domestic firms who import crude and intermediate goods for use in manufacturing. On the other hand, deflation in import prices is a concern for the Fed, even more so than inflation. This is one reason to keep the spigots open. However, the quantitative easing program is doing little to foster price growth because most of the newly printed money is being held in bank accounts at the Fed rather than entering the broader economy as loans (see my post General Thoughts on the Economy).
For bond investors and cash holders, this muted import price growth and low inflation environment is good news as, despite very low returns, there is not much loss in purchasing power. For fixed income investors, the bigger worry is a possible pullback in Fed stimulus. When that happens, which it eventually will, interest rates will most likely rise, leading to losses for bond holders. If the economy remains weak at that point, rising interests could dampen the recovery, which will weigh on stocks as well.
Still, the continued downtrend in overall import prices is helping to keep inflation in check, which is good for consumers, fixed income investors and domestic firms who import crude and intermediate goods for use in manufacturing. On the other hand, deflation in import prices is a concern for the Fed, even more so than inflation. This is one reason to keep the spigots open. However, the quantitative easing program is doing little to foster price growth because most of the newly printed money is being held in bank accounts at the Fed rather than entering the broader economy as loans (see my post General Thoughts on the Economy).
For bond investors and cash holders, this muted import price growth and low inflation environment is good news as, despite very low returns, there is not much loss in purchasing power. For fixed income investors, the bigger worry is a possible pullback in Fed stimulus. When that happens, which it eventually will, interest rates will most likely rise, leading to losses for bond holders. If the economy remains weak at that point, rising interests could dampen the recovery, which will weigh on stocks as well.