Inflation watch: Import prices jump on higher oil

Is oil starting to feed inflation into the U.S. economy? August's import prices are flashing a mild caution sign, rising two percent on higher petroleum prices, the U.S. Labor Department announced Friday.

Import prices have now increased 7.6 percent so far in 2009, as energy prices have doubled since January. Even so, import prices are still down 15 percent over the past year. Imported fuel prices rose 9.8 percent in August. Import prices fell 0.7 percent in July.
Little inflation, so far

Meanwhile, non-fuel import prices rose 0.4 percent in August, the largest gain in a year. Still, non-fuel import prices are down 5.1 percent on a year-over-year basis -- indicating that deflationary pressures remain in the U.S. economy, at least so far. Still, economists caution that if oil prices continue to march higher, prices could stabilize and begin an upward trend quickly, given oil's importance in the economy.

In August, industrial supply prices surged 6.1 percent, imported capital goods increased 0.1 percent, and fuel/feed/beverage prices rose 1.7 percent.

By region, goods imported from Canada increased 2.7 percent; Mexico, up 2.3 percent; Europe, up 0.2 percent; China, 0.2 percent; and Japan, up 0.1 percent.

Also in August, export prices rose 0.7 percent, propelled higher by a 2.8 percent in industrial supplies; agriculture export prices rose 0.2 percent, and capital goods prices increased 0.1 percent. Export prices fell 0.3 percent in July. In the past year, export prices have plunged 6.1 percent.

Economists follow the import price statistic because it provides an accurate gauge of future inflation trends, given the large amount of goods that the globally-connected U.S. economy imports each month. Economist also monitor oil prices, included imported oil prices, because of the U.S. economy uses a larger amount of oil, both as a function of commerce and on a per capita basis, than most major, industrial nations.

Economic Analysis: Import prices remain lower, and one can see the impact of decreased demand in the year-over-year 15 percent import price decline. That said, if oil, currently about $70 per barrel, continues to trend higher, the elevated price combined with expected rising demand stemming from the recovery could re-ignite inflation in a short time. It's certainly something the U.S. Federal Reserve is keeping an eye on.

The oil price also highlights the vulnerability of the U.S. economy to inflation due to its dependency on oil. Oil prices are largely beyond the nation's control, hence inflation, to a certain degree, is beyond the nation's control. That underscores the need for the U.S. to reduce its dependency on crude; as usage trends stand now, the U.S. could do everything correct from a monetary and fiscal standpoint and still incur inflation, due to the internationally-set price of oil.
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