Thursday, December 09, 2004

Is the global economy catching a whiff of inflation?
The price of goods imported into the United States in November rose 0.2 percent, slightly more than expected, a Labor Department report showed on Thursday, as increases in non-petroleum prices hit a 10-month high.

Wall Street had forecast a milder 0.1 percent advance following a revised 1.6 percent gain in October. This was initially reported as up 1.5 percent. Export prices were up 0.3 percent compared with 0.7 percent in October.

Non-petroleum import prices increased 0.7 percent last month after falling 0.1 percent in October, marking the largest increase since January's 0.8 percent gain. Over the last 12 months this series has risen 3.4 percent, the strongest annual gain since September 1995.
This is a pretty strong number for non-petroleum import prices, which since April 2004 have been consistently above a 2% annual inflation rate. Non-fuel import prices are also above the 2% rate, although the news there is far less inflammatory. After big rises in early 2004, things have settled down noticeably. In November the annualized 3-month non-fuel import inflation rate stood at just 1.2%. Much of that is due to imported food and beverages.

Is the falling dollar finally having an impact? Back in 1995 when US import inflation was last seen at this level, the dollar was at its lowest real level (per the real broad dollar index) since 1978. Even if the USD stabilizes nominally, lower inflation in Europe and outright deflation in Japan means the real dollar will continue to fall.

The real proof is in the PCE pudding. October's monthly personal consumption expenditures inflation rate stood at a rather high 0.40%, the highest level in two-and-a-half years. Annual PCE inflation in October was 2.4%, on the high end of normal by contemporary standards (which I judge to be a 1-3% range). Of course, much of that is due to non-traded services inflation. That being said, annual durable goods deflation slowed in October, now at -1.1% and up from below -4.0% in late 2003.

The falling dollar will only truly start acting as a corrective salve to the wildly unbalance global economy when it begins reducing US consumption. Import prices are rising (although not markedly so), but through October that hadn't stopped the American consumer one bit. If this holiday shopping season proves at the end of the day to be as mediocre as it appears now, we may be at the beginning of the Great Correction.

And then things start to get dangerous. It's easy to stay the course, after all. That's what both the US consumer and the Asian central banks have been doing these last four years. It's hard to stop, turn around, and begin living a new way.

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