Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Import Prices Just Surprised the Market
Transcript
- Lucas: Import prices just posted their biggest surprise in months — costs of goods from China hit their highest level since 2008. That's the headline from yesterday's data, and it cuts against a lot of what we've been saying about disinflation. Luna: Right, because just a week ago we saw wholesale prices drop unexpectedly, and core CPI is still trending down. So this feels like a splinter in the inflation story. Lucas: Exactly. The producer price index fell 0.3 percent in June, driven by a big drop in gasoline. But import prices — those came in hot. The index rose 0.4 percent month over month, and the year-over-year gain accelerated to 3.1 percent. That's the fastest pace since early 2023. Luna: And you said China specifically — what's going on there? Lucas: The cost of goods imported from China jumped 1.2 percent in June alone. Year over year, they're up 5.8 percent. That's the highest since 2008. And it's not just one category — it's broad-based. Industrial supplies, consumer goods, capital goods. The old narrative that China is exporting deflation? It's getting complicated. Luna: Well, and this is happening while China's own economy is slowing — GDP grew at just 3.2 percent annualized in the second quarter, the slowest since early 2022. You'd think weaker demand there would mean cheaper exports. Lucas: You would. But a couple of things are at play. One: tariff hangover. The US has kept most of the Trump-era tariffs in place, and the Biden administration actually expanded some on strategic goods. So even if Chinese factory prices are flat, the landed cost in the US includes those tariffs. Luna: So the price at the dock is inflated by policy, not just market forces. Lucas: Right. And two: the dollar. It's been strong, but it's not strengthening as fast as it was last year. The dollar index is roughly flat over the past three months. That means the currency tailwind that was suppressing import prices is fading. When the dollar stops rising, foreign goods become more expensive in dollar terms. Luna: So we've got tariff-inflated costs and a less helpful dollar. But then why are wholesale prices falling? That seems contradictory. Lucas: It is, on the surface. But remember, wholesale prices mostly track domestic producer costs — energy, food, intermediate goods. That index fell because gasoline plunged. Import prices are a different channel: they capture goods that cross the border, often with a lag. So you can have a domestic energy-led deflation alongside a trade-led import inflation. The economy is not one monolithic price level. Luna: Which makes the Fed's job harder. They're trying to cut rates — the effective Fed funds rate is still at 3.63 percent — but if import prices are heating up, that's a headwind to their confidence that inflation is sustainably heading to 2 percent. Lucas: Exactly. The market is pricing in a cut at the September meeting, but this data point gives hawks ammunition to wait. The 10-year yield is at 4.54 percent — it actually dipped a bit on the week, but it's still above 4.5. That's the bond market saying, 'We're not convinced the inflation fight is over.' Luna: And the S&P 500 is down 0.8 percent this week. Part of that is tech profit-taking, but the import price surprise probably didn't help sentiment. Lucas: No, it didn't. The market hates uncertainty about the inflation path. When you get a data point that breaks the disinflation narrative, it forces traders to re-evaluate the rate outlook. And that's exactly what's happening. Luna: So is this a blip or a trend? Import prices are volatile month to month. Lucas: It's too early to call it a trend. But there are structural reasons to think import prices may stay elevated. One: nearshoring and friend-shoring are real. The US is importing more from Mexico and Vietnam, but those supply chains aren't as efficient as China's yet, so unit costs are higher. Two: the tariff regime isn't going away anytime soon. Three: China itself is trying to shift from deflationary export-led growth to more domestic consumption — that could reduce the glut of cheap goods. Luna: And if China's economy keeps slowing, they might actually dump more goods to support growth — that would push prices down. But you're saying the opposite is happening. Lucas: Right, which is why this is such a puzzle. The data we have right now shows Chinese export prices rising. Part of that might be compositional — China is exporting more sophisticated goods like EVs and solar panels, which have higher price tags. But part of it is also that global shipping costs have surged due to disruptions in the Red Sea and Hormuz. The ECB is even talking about rate implications from Hormuz hostilities. Luna: So we have a perfect storm: tariffs, shipping disruptions, a less helpful dollar, and China's own structural shift. That's a lot for the Fed to untangle. Lucas: It is. And this is where the macro story gets really interesting. The Fed is data-dependent, but the data is sending mixed signals. Core PCE — their preferred gauge — is still running above 2.5 percent. The unemployment rate ticked down to 4.2 percent, jobless claims are low at 208,000. The labor market is resilient. So they have room to wait. Luna: But cutting too late could choke off growth. Real GDP growth annualized was only 2.1 percent in Q1 — up from near zero, but still modest. Lucas: Right, and consumer spending is showing some cracks. The Fed's Beige Book this week mentioned that bars and restaurants got a World Cup boost, but also that consumers are flashing warning signs — more credit card usage, more reliance on savings. If import prices keep rising, that's another tax on consumers. Luna: So the import price data is a lens into a broader tension: global inflation pressures are re-emerging even as domestic inflation cools. That's a great framing for this episode. Lucas: Exactly. And that's why we're spending time on it — because it's not just a niche data point. It's a window into the next phase of this cycle. Luna: If walking through the economy with us has made something click — if you now look at import prices and think about tariffs, or the dollar, or China's growth — that's exactly the kind of understanding we're trying to build here. Lucas: And the way we keep these conversations ad-free and focused is listener support. If today was useful to you, you can help at buy me a coffee dot com slash fexingo. No pressure — just a way to keep this going. Luna: Yeah, it's how we stay independent. So appreciate anyone who chips in. Lucas: Alright, so where does that leave us? I think the key takeaway is that import prices are a canary in the coal mine for the global inflation cycle. The US is not an island — what happens in Chinese factories and on container ships feeds directly into the prices Americans pay. Luna: And for the Fed, it means the path to 2 percent inflation is not a straight line. It's more like a winding road with potholes. Lucas: Exactly. And that's the macro story we'll keep watching. Next week we get the first estimate of Q2 GDP — that's going to be a big one. We'll see how the consumer held up, and whether import prices start feeding into consumer inflation more broadly. Luna: Always something to track. Thanks for hanging with us.