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Market Wrap-Up: Scared of Inflation? What Inflation?

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Published Aug 10, 2012
2 min read
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If you’re scared of inflation, you might be in for a surprise: New data on import prices suggests that inflation prices may actually be easing.

The July Department of Labor report on US import prices showed a 0.6% decline, while economists have expected an increase of 0.1%. Even more startling, the data shows import prices dropped 3.2% on a year-on-year basis, the largest such drop since October of 2009.

Taken alone, this reading might not mean much, but other recent indicators are also pointing to a potential decline in inflation.

Signs of Decreasing Inflation

For instance, the recent drop in oil and gasoline prices (down about 10.5%): Although these impact consumer prices rather than import data, they also point in the direction of lower inflation. It stands to reason that with a tepid US recovery, slowing Chinese growth, and much of Europe mired in outright recession, prices are bound to drop.

Speaking of China, its recent import numbers paint a similar picture of declining global demand. And with lower demand comes –you guessed it –lower prices.

But….

But what about the historically low interest rates and all that stimulus money sloshing around? Surely that will lead to higher inflation – if not now, at least eventually –right?

While it’s true interest rates are bound to eventually rise – after all, the Fed Funds rate is currently effectively zero, it doesn’t mean that they’ll rise precipitously. Nor does it mean inflation will skyrocket.

Heck, inflation was just 1.7% as of June – and that’s below the range the Fed and most economists consider healthy. Even if inflation were to double, it would still only be 3.4% — hardly hyperinflation.

The Bottom Line

The fact remains that there are strong downward pressures on the global economy, and unemployment remains high here at home. Import and certain commodity prices are dropping. Banks are still scared and aren’t lending very much. Money isn’t flowing.

Sure, nobody can tell the future, and calamity may strike sending inflation sky high. But in the current environment, it’s hard to see where the inflation would come from.

“Market Wrap-Up: Scared of Inflation? What Inflation?” was written by MintLife Managing Editor, Janet Al-Saad.