Interest Rate Roundup

Friday, April 11, 2008

Import inflation explodes; Confidence tanks

Look, there's no way to sugarcoat the import price figures that were released today. They stunk to high heaven. Some details:

* Overall import prices surged 2.8% in March, well above the 2% rise that was expected. If you strip out petroleum, you still get a very large 1.1% rise. Strip out all fuels? Prices were up 0.9%, the biggest since this data category started being reported in 2001.

* The year-over-year rate of import inflation is up to a whopping 14.8%. That is up from 13.4% a month earlier and the highest rate in U.S. history (data goes back to 1982; chart above).

* Another key reading buried in the figures: Chinese import prices were up 0.7%. That continues a multi-month string of increases after persistent declines. In other words, emerging markets and countries like China have gone from exporting deflation to exporting inflation. The Wall Street Journal had a good story to this effect yesterday.

We keep hearing from the Ivory Tower economics crowd that inflation is a lagging indicator, that we shouldn't care about the increases, blah, blah, blah. Yet almost every month, the dollar loses more value, commodity prices climb, and import price inflation surges. Eventually, the Fed may be forced to pick its poison -- keep targeting growth by cutting rates and flooding the system with money or putting its foot down and targeting inflation. Alternatively, the dollar will need to bottom out and turn around -- something we haven't seen happen yet (the Dollar Index is down another 32 bps as I write)

Wall Street has been talking about an improved tone to the market lately. But consumers apparently aren't seeing it in their everyday lives. The University of Michigan's consumer confidence index dropped even further in April -- to 63.2 from 69.5 a month earlier. That's the worst reading going all the way back to March 1982.

Moreover, inflation expectations are rising. Consumers expect inflation to come in at 4.8% over the next year, the highest reading since October 1990 (a tie at 4.8%). Consumers haven't expected a higher inflation rate since July 1982. More proof of stagflation? Sure looks like it.


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