The Fed dropped interest rates yesterday, as expected. The 25-basis-point cut looked overly cautious in the eyes of some. But after reading this morning’s report on import prices, the question is whether a 1/4-point cut is a 1/4-point too much?
Yes, there’s the problem of credit crunching and a slowing economy. By that standard, the central bank is doing its job of easing the pain. But then there’s the issue of the Fed’s other mandate: price stability.
The subject promises to be topical today and in the days ahead after investors digest the fact that import prices last month rose 2.7%–the largest monthly increase since 1990, the Bureau of Labor Statistics reported. That elevates the 12-month gain in the import index to an extraordinary 11.4% through the end of November. Such levels haven’t been seen since the 1980s, as our chart below reveals.
Of course, we can almost hear the optimists countering that the rise was due largely to the surge in energy prices in November. Quite true, and if you exclude petroleum from the figures, import prices rose by a substantially lesser pace of 0.7% last month. Yet the fact remains that prices paid for imports are on the rise generally, and in more than a few cases the pace is in the upper range for recent if not distant history. Indeed, a review of the various categories of imports shows that the annual pace of price increases through November is generally advancing at or above the 3.5% annual inflation rate for the U.S. consumer price index.
The U.S., in short, runs the risk of importing inflation at a higher dosage than we’ve seen in quite a few years. It’s not a huge problem today, next week or next month. But over time, left untended, the disease will take its toll. The U.S., after all, is the world’s biggest economy with a taste for imports to the tune of nearly $200 billion a month, and growing at more than 6% a year, according to the latest numbers from the Commerce Department.