Deflation is a rising risk for the economic outlook based on import and export price data where contraction is at its most severe since the 2008-2009 recession. Import prices fell 2.8 percent in January alone for year-on-year contraction of 8.0 percent. And it's much more than just the impact of the strong dollar as export prices are also in contraction, at minus 2.0 percent for the month and minus 5.4 percent on the year.
The contraction is centered in petroleum where import prices fell a monthly 17.7 percent for year-on-year contraction of 40.1 percent. Excluding petroleum, import prices are still down sharply, at minus 0.7 percent for the month, which is the sharpest drop for this core reading since March 2009, and minus 1.2 percent for the year.
Turning to details on export prices, agricultural prices fell 1.2 percent for a year-on-year minus 6.3 percent. Excluding agriculture, export prices are down 2.1 percent, which is the largest drop since November 2008, and down 5.3 percent on the year.
The deflationary pull from inputs is now visibly pulling down prices of finished products. Showing an unusual sweep of steep monthly declines are import prices for capital goods (minus 0.4 percent), motor vehicles (minus 0.5 percent), and consumer goods (minus 0.3 percent). Year-on-year, all are also in contraction. The export side is less severe but does tell a similar story with consumer goods showing the most contraction, at minus 0.8 percent for the month and minus 1.4 percent for the year.
Fed policy makers are hoping that deflationary effects, tied mostly to oil prices, will prove limited, but there's no evidence right now that prices are pulling higher, on the contrary, price contraction is accelerating. Today's reports point to deflationary readings for the coming producer and consumer price reports.
Import prices fell a very steep 2.5 percent in December following a downwardly revised contraction of 1.8 percent in November and declines of 1.4 percent and 0.8 percent in the prior 2 months. Year-on-year, import prices are down 5.5 percent. The contraction in oil prices is of course the central factor behind the deflation with petroleum prices down 16.6 percent in December alone for a year-on-year decline of 30.1 percent. But excluding petroleum, import prices were no better than flat, up 0.1 percent in December and unchanged year-on-year. Export prices, where petroleum is less of a factor, were also down. Export prices fell 1.2 percent in the month for a year-on-year decline of 3.2 percent. Agricultural prices are key on the export side and were down 0.7 percent on the month and down 4.9 percent on the year.