Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How the Fed Reads China Import Prices in July 2026
Transcript
- Lucas: So Friday's import price report caught my attention — costs of goods from China hit their highest level since 2008. This is July 2026, and we're seeing this spike right as domestic inflation measures are finally cooling. Luna: That feels contradictory. Core CPI ticked down, wholesale prices fell 0.3 percent in June on that big drop in gasoline. So where's the Chinese import pressure coming from? Lucas: It's partly a base effect — energy and commodity prices were surging back in early 2022, so year-over-year comparisons are easier now. But what's interesting is that the China import index is being driven by finished goods, not raw materials. Think electronics, machinery, consumer goods. Luna: Right, and those are the categories the Fed watches closely because they feed directly into core goods inflation. Lucas: Exactly. Core goods inflation has been negative for several months — that's been a big help to the Fed's inflation fight. But if import costs from China keep rising, that trend could reverse. The question is whether this is transitory or structural. Luna: Transitory — there's that word again. What's driving the increase? Tariffs? Shipping costs? Or is it actually stronger demand? Lucas: A bit of all three. There are still lingering tariff effects from the earlier trade rounds, though some exemptions were renewed. Shipping rates have normalised from the pandemic peaks but are still above pre-2020 levels. And demand — well, the US consumer has been remarkably resilient. But the Beige Book from last week noted that bars and restaurants got a World Cup boost, while other retailers saw more cautious spending. Luna: So the Fed sees mixed signals. The consumer is still spending on experiences but pulling back on goods. That should cap import demand. Lucas: In theory. But the import price data is backward-looking — June shipments. The question for the Fed is what July and August look like. And the bond market is already pricing in some uncertainty. The ten-year yield hit 4.63 percent today, up almost two percent in five days. The two-year is at 4.37. Luna: That inverted yield curve is still with us — two-year above ten-year. That's been a recession signal historically. Lucas: It has, but it's been inverted for over two years now without a classic recession. Some economists argue it's less predictive when the Fed is actively shrinking its balance sheet. The Fed's interest on reserve balances is still at 3.65 percent, and the effective fed funds rate is flat at 3.63. So policy is restrictive, but not aggressively so. Luna: What about the breakeven inflation rate? I saw the ten-year breakeven ticked up to 2.25 percent. That's still below the Fed's 2 percent target if you squint, but it's creeping higher. Lucas: Right, 2.25 is actually above the target — it implies the market expects inflation to average slightly above 2 percent over the next decade. That's been drifting up from 2.24 last week. Not a dramatic move, but the direction matters. Especially when you pair it with the core PCE, which is the Fed's preferred measure. Core PCE was at 130.1 in May, up from 129.67. So it's still running a bit hot. Luna: So the Fed is in a bind. Goods deflation from lower commodity prices is helping, but rising import costs from China could offset that. And the services side is sticky. Lucas: Exactly. The services sector is where the Fed sees the most persistent inflation — things like rent, medical care, and dining out. The World Cup bump probably added some temporary noise to that. But the underlying trend is that services inflation is slow to come down. That's why the Fed is likely to hold rates steady for now. Luna: And the wholesale price decline — 0.3 percent drop in June — that's a positive sign for future CPI, because producer prices eventually feed through to consumer prices. Lucas: It is, but it was driven largely by gasoline. Core producer prices, excluding food and energy, were actually flat. So the deflation is concentrated in energy. That's helpful, but not a broad-based trend. And if geopolitical tensions in the Middle East escalate — the headlines about renewed Hormuz hostilities — energy prices could spike again. Luna: That would hit the import price data too, since China is a big importer of oil and then re-exports refined products. Lucas: Right. So the Fed is watching a lot of cross-currents. The China import price spike is one more piece of evidence that the inflation fight isn't over. But it's also not a reason to panic. The Fed has time — they don't meet again until September. They can wait for more data. Luna: Speaking of waiting — Lucas, we've been doing these deep dives for over a hundred episodes now, and I know a lot of listeners appreciate that we keep it ad-free and focused on the numbers. Lucas: Yeah, that's something we're proud of. And the only reason we can do that is because a small group of listeners chips in each month through buy me a coffee dot com slash fexingo. It's not a big ask — it's what keeps the lights on and lets us spend time on these episodes. Luna: Exactly. So if you've been getting value from the show, that's the way to support it. No pressure, just something to consider. Lucas: Alright, back to the data. One other thing I'm watching — China's GDP growth slowed to its weakest since 2022 in the second quarter. That could reduce demand for imports from the US and other trading partners, which might actually help the Fed by lowering global inflationary pressures. Luna: So slower Chinese growth could be disinflationary for the US? That's an interesting twist. Lucas: It could be. If China's economy softens, commodity prices could fall further, and that would feed into lower import prices for the US. But it also means weaker demand for US exports, which is a headwind for corporate profits. The Fed has to weigh all of this. Luna: And the market seems to be pricing in that uncertainty — the S&P 500 is down 0.8 percent over the past five days, and the NASDAQ is off 1.5 percent. Tech stocks are more sensitive to rate expectations. Lucas: Right. The Russell 2000 is actually flat — small caps are a bit more insulated from global trade. But overall, the market is saying the path for rates is unclear. The Fed's next move could be a cut, but not until inflation is clearly headed to 2 percent. And this China import price data adds a wrinkle. Luna: So what's the one thing you want listeners to take away from this episode? Lucas: That the Fed is data-dependent, and one data point doesn't change the outlook. Import prices from China rose, but wholesale prices fell. Core PCE is still above target, but the trend is improving. The Fed will wait for more confirmation before moving. Patience is the theme. Luna: Patience. That's a good word for the second half of 2026.