Import prices in the U.S. fell in August for the first time in six months due to weak petroleum and food costs, but as oil prices slowly stabilize and the dollar rally slows down, the declining trend is slowing.
The report on Wednesday from the Labor Department points to a modest near-term inflation outlook that may tip the scales for the Federal Reserve to decide on keeping interest rates steady next week.
Import prices, which went up in July by 0.1 percent, decreased by 0.2 percent last month, the first time since February with a 2.8 drop in petroleum prices taking the lead. Prices of imported petroleum went down 3.7 percent in July.
In the past 12 months, import prices slipped 2.2 percent, which is the smallest decrease since October 2014, after its July decrease of 3.7 percent.
“Most Fed officials expect the gradual climb toward the inflation target to remain intact and the diminishing drag from import price deflation will help, but it’s going to take time,” said Sam Bullard, a senior economist at Wells Fargo Securities. “We expect the Fed to remain cautious, leaving rates unchanged next week.”
Weak inflation data is usually compounded to slower job growth, and weaker manufacturing and service sectors, which decrease the likelihood of the Fed increasing interest rates in their September 20-21 policy meeting.
Fed Governor Lael Brainard said that she wanted stronger consumer spending data and increased inflation before moving to increase interest rates.
Persistently low inflation is keeping increased benchmark overnight interest rates out of the picture since the central bank lifted its rates at the end of the previous year.
There was little movement in financial markets after the data was released.
The strength of the dollar and cheap oil is keeping import prices low, and together with low wage growth, inflation has been kept below the Fed’s target of 2 percent. But as the dollar rally comes to its peak and oil prices slowly climb, the situation could reverse.
Import prices excluding petroleum remained the same in August after it jumped up 0.5 percent in July. For the past 12 months until August it was down 0.9 percent, which is the smallest year-on-year decrease since December 2014.
“In spite of the month-to-month volatility, we view the underlying trend in imported deflation as improving and consistent with gradual waning of the drag from the stronger dollar and lower global commodity prices,” said BlerinaUruci, an economist at Barclays. “We expect an improvement in imported inflation to help stabilize domestic core goods prices in the coming months.”
Import deflation is coming mostly from China as the cost of imported goods were down 0.2 percent last month. The price of Chinese goods has not yet increased since December 2014. Declines in costs for imported goods also came from Canada, Europe and Mexico.
Imported communication products were the top declining cost going down by 1.0 percent. The cost of Japanese imports, however, rose 0.3 percent, the largest gain since August 2011.
The cost of vehicles fell 0.2 percent and other consumer goods went down 0.1 percent. Imported food costs also declined 0.5 percent.
Export prices, according to the report, slipped 0.8 percent in August after a 0.2 percent drop in the previous month. The price of exported goods were 2.4 percent lower than a year ago.