Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Import Prices Just Surprised the Market
Transcript
- Lucas: Alright, so import prices just surprised to the upside — the first gain in months, according to data out Friday. Costs of goods from China hit their highest level since 2008. Luna: That's a big deal for the disinflation narrative, right? We've been talking about falling wholesale prices, but this is a headwind. Lucas: Exactly. Wholesale prices did decline 0.3 percent in June — that was a surprise too, driven by a big drop in gasoline. But import costs are a different channel. They feed into core goods inflation more directly. Luna: And China's economy is slowing — they just posted their slowest quarterly growth since 2022. So higher export prices from them seems counterintuitive. Lucas: It is. Normally you'd expect weaker demand in China to push down export prices. But a lot of this is about supply chain costs — shipping, raw materials, maybe some currency effects. The renminbi has been under pressure. Luna: So the question is: does this derail the path lower in core inflation? Or is it a blip? Lucas: That's the key debate. The Fed's preferred gauge, core PCE, has been sticky. The latest reading was 130.1 — up from 129.67 in the prior month. Not a huge move, but it's not declining either. Luna: And the 10-year breakeven inflation rate is at 2.22 percent — basically anchored. Markets aren't panicking. Lucas: Right. The bond market is basically saying 'we believe the disinflation trend is intact.' But if import prices keep rising, that could start to show up in the CPI and PCE data in the coming months. Luna: And we already saw headline CPI drop from 333.98 to 332.6 in June. That's partly base effects, partly energy. Core CPI was basically flat. Lucas: So the inflation picture is getting more nuanced. The easy declines — from supply chains healing and energy coming down — may be behind us. Now we're in a phase where sticky services and potential goods price pressures from imports could keep core inflation above target. Luna: Speaking of which — the Fed Funds rate has been at 3.63 percent since June. No change. And the interest on reserve balances is 3.65 percent. Lucas: That's where it gets interesting. The Fed is in wait and see mode. They've cut once, but the labor market is still strong — unemployment dropped to 4.2 percent, nonfarm payrolls are up. Job openings even ticked up slightly to 7.594 million. Luna: So growth is solid, inflation is sticky but not reaccelerating, and now import prices throw a wrench in the narrative. It's a tough spot for the Fed. Lucas: It really is. If import prices keep rising, the Fed might have to hold rates longer. But if they're just a one-month blip, then the disinflation trend continues and they can cut again later this year. Luna: What do you think is more likely? Lucas: I lean toward the blip theory, but I'm cautious. The China factor is real — they're trying to stimulate their economy, and if that means weaker currency and higher export prices for us, that's a headwind. But the broader disinflation trend is still intact globally. Luna: And we've got the ECB dealing with their own issues — renewable energy costs spiking after Hormuz hostilities. That's a separate shock. Lucas: Yeah, that's a whole other conversation. But for the US, the import price data is the new variable to watch. Next month's report will be crucial. Luna: If walking through the economy with us has made something click, a small number of listeners chip in monthly at buy me a coffee dot com slash fexingo — and that's what keeps this show ad-free and independent. Lucas: Honestly, it makes a real difference. It means we can keep digging into data like this without chasing clicks or sponsors. Luna: Yeah, it's a simple model — listener supported, no ads. So if it works for you, it works for us. Now, back to those import numbers. Lucas: So where do we look for the next signal? I'd say the July import price report in August, and the next core PCE reading. If both show acceleration, then the Fed is going to be in a bind. Luna: And the consumer? The World Cup gave bars and restaurants a boost, but the Fed's own Beige Book mentioned consumers are flashing warning signs. Lucas: That's the other side of the coin. Consumer spending has been resilient, but credit card debt is rising, savings are depleting. If import prices push up goods costs, that could squeeze consumers further. Luna: Especially lower-income households, who spend a larger share on goods. Lucas: Exactly. So the import price story isn't just about inflation — it's about the consumer, and by extension, the growth outlook. If consumers pull back, GDP growth slows, and then the Fed has a different problem. Luna: But GDP growth was at 2.1 percent annualized in Q1 — not bad. Real GDP is still expanding. Lucas: Right, but that's backward-looking. The import price data is a forward indicator. If it persists, it could weigh on consumption and complicate the inflation picture. Luna: So you're saying the next few months are critical? Lucas: Absolutely. We're at an inflection point. The easy disinflation is done. Now we see whether the remaining inflation is truly stubborn or whether it fades. Import prices will be a key test. Luna: And the bond market is pricing in about a 50 percent chance of a cut by September — that seems optimistic if import prices stay elevated. Lucas: It does. But markets are forward-looking. If they think this is temporary, they'll look through it. The 10-year Treasury yield is at 4.55 percent, down a bit on the week. That suggests some confidence in the disinflation trend. Luna: So the data is giving mixed signals, but the bond market is leaning one way. That's the tension. Lucas: Exactly. And that tension is what makes this environment so interesting. We'll be watching the July data closely. Luna: Good. Let's check in next week when the next import price figures come out.