Inflation Hard to Find as Import Prices Fall

Import prices fell far lower in December 2015 than in the prior month, while export prices fell nearly twice as much as analysts had expected.  Import prices fell 1.2 percent on a month-over-month basis in December, according to the Bureau of Labor Statistics. That represented the largest drop in import prices since August 2015. While fuel prices continue to decline as oil future prices flirt with sub-$30 levels, the Bureau of Labor Statistics noted non-fuel prices “continued to trend down as well.”

Import prices fell far lower in December 2015 than in the prior month, while export prices fell nearly twice as much as analysts had expected.  Import prices fell 1.2 percent on a month-over-month basis in December, according to the Bureau of Labor Statistics. That represented the largest drop in import prices since August 2015. While fuel prices continue to decline as oil future prices flirt with sub-$30 levels, the Bureau of Labor Statistics noted non-fuel prices “continued to trend down as well.”

Because of the drop in import prices, 2015 saw the largest year-over-year decline in import prices since 2008. That year has last year handily beaten, with 2015’s 8.2 percent annual decline in prices far below 2008’s 10.1 percent decline.  Nonetheless, the acceleration in price declines leads some economists to worry that the aggressive pressure put on the Federal Reserve to raise rates may have been unwarranted.

Decidedly Less Hawkish

A surprising voice warning against aggressively tight monetary policy is Jim Bullard, the St. Louis Federal Reserve President.

Bullard has become famous for warning that quantitative easing is a recipe for inflation, and for insisting that easy money policies are more damaging and should be curtailed as much as possible. Bullard also fanned the fire of gold bugs and inflation hawks who warned of hyperinflation during 2010 and 2011, when the first and second rounds of QE expanded the monetary base in the United States substantially.

Now, however, Bullard is taking a much softer tone on inflation and beginning to worry that deflation constitutes a likelier risk to the United States economy. Noting a fall in oil hampering the cost of goods and services throughout the world, Bullard said that oil prices have “fallen dramatically since mid-2014” and that this causes headline inflation to be “very low.”

Bullard also hinted of further oil declines to come, noting that recent declines in the commodity price are “not quite enough to return to the real dollar price” of oil from 1988 to 2003. The average value of oil during that time was $30, which currently serves as a floor to oil prices as opposed to a baseline. In the late 1990s, oil fell to far below $20 a barrel and remained there for about a year, which partly helped keep the average so low.

Bullard also pointed out that an overcapacity of oil production due to the tripling of oil prices between 2008 and 2014 and earlier, from 1988 to 2003, has resulted in falling oil prices.  This will prove beneficial for the U.S. economy. However, Bullard warned that oil would have to spike up to about $40 per barrel and stay there for the headline consumer price index to rise to above 2 percent.

If, however, oil remains range-bound or continues to fall as it has hinted at doing, Bullard believes inflation is unlikely to be meaningfully present in the United States—a sharp reversal from previous assertions that inflation needed to be much more of a focus of the Federal Reserve Open Market Committee’s agenda in setting monetary policy.