Falling Import Prices Help Contain Inflation and Interest Rates

  • Due to the strengthening in the U.S. dollar the prices of imported goods are falling.  That is helping the overall consumer prices to be tame.  Low inflation means interest rates can remain low for a longer period.
  • In the latest month, import prices fell for the 8th time in the past 9 months.  As a result, import prices were 10.5 percent below one year ago.  Despite much increased oil production in the U.S. in recent years, principally from new oil wells in North Dakota and Texas, America still imports about half of its oil consumptions (though not the two-third from imports as had been just a decade ago).  Therefore, falling global oil price also significantly impacts U.S. import prices.
  • Low import prices filters into the broad consumer prices.  Today, there is virtually no inflation to speak of.  The top line consumer price inflation was in fact precisely zero in February over the past 12 months.  The core inflation – that is, not including the volatile food and energy prices – was also tame with only 1.7 percent growth.  The core inflation rising above 2 percent on a consistent basis would cause the Federal Reserve to raise interest rates.
  • The relationship between core inflation and mortgage rates are shown below.  As can be seen, high core inflation means much higher mortgage rates and vice versa.
  • The U.S. dollar is strong against nearly all other foreign currencies.  There is one major exception.  The Chinese currency – Yuan – has been stalking the dollar and is actually getting stronger.  One dollar used to command 8.5 yuan at the turn of the century but now gets only 6 yuan.  Given the large trade surplus China has with the U.S. the Chinese currency is likely to strengthen even further in coming years.
  • It is hard to imagine not too long ago China was insignificant on the world stage.  Most were living in dire poverty from communal ownership of property with no incentive to work hard.  There were even trade restrictions of not importing communist Chinese products into the U.S.  Once there was a big fight among State Department officials over eggs that were brought into the U.S. from Hong Kong.  It was unclear whether these eggs had been originally imported from the mainland China or if the eggs had been laid in the British Hong Kong.  Was it a free world egg or a communist egg?  One was considered safe while the other very dangerous.

import30 yearFE

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

More Posts