Wednesday, August 13, 2003

The US import price index rose a healthy 0.5% in July, suggesting at least an externally induced source of inflation for the disinflationary economy. But is this really the case?

In fact, rising petroleum prices and imports drove nearly all this inflation. Petroleum import prices rose a big 3.7% in July, whereas all other imports rose a meager 0.1%. Over the last year, non-petroleum import prices have risen just 1.2%, much of that number accounted for by an unusually sharp 1.0% rise in March 2003. Consumer goods import prices continued to fall in July, especially consumer durables. Japan and the Asian NICs are the main sources of import price deflation, and coincidentially they all either peg to the dollar or heavily manage their currencies' floats against the dollar. Vis-a-vis the US's other major trading partners, a not just steadying but strengthening suggests core import prices overall may very well return to a deflationary trend as in 2001.

On the export side, prices dipped 0.1%. This was the third out of the last four months that export prices fell, a sign of soft demand abroad. Non-agricultural export prices have been falling steadily since April. When the strongest and largest economy in the world is exporting deflation -- and in the face of a strengthening currency no less! -- you know the global economy is still very dicy.

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