That may sound like an odd headline but the impact of rising import prices on the economy is no trivial matter. We have written recently that the recent surge in oil prices was a net negative impact to the consumer as those prices work their way through the system. The 3.6% surge in the price of imported petroleum products skewed total import prices 0.7 percent higher in November and we are now 9.9% higher in the last year.
The strengthening of the U.S. dollar, which is getting a major boost from safe-haven demand tied to Europe, is a major factor helping to subdue inflationary pressures from import costs. This also explains why the Fed has not mentioned Quantiative Easing at the last couple of meetings as inflationary pressures remain above their long term target, statistical unemployment has declined and the dollar has strengthed. Any further intervention will drive commodity prices, and ultimately inflationary pressures, higher faster than the consumer can adjust.
The rise in import prices without a subsequent and corresponding rise in export prices sets the economy up for the double whammy. Rising import prices crimps the ability for consumers to consume. Since the consumer provides the aggregate demand for businesses this in turn begins to impact corporate profitability. However, with export prices failing to have a corresponding rise to import prices the impact to corporate profitability becomes even greater. As you can see in the chart the last time that net export prices was this negative was just prior to the last recession. However, back then credit was easy, inflationary pressures were subdued and liquidity was plentiful to support the economy far longer than expected. Today, we are not nearly as in good of shape and it is doubtful that the economy can buck the pressures for very long.
This all feeds into our continuing thesis that the economy is far weaker than the headlines state and that the potential for recession in the next year is higher than the markets are currently anticipating. With the majority of analysts already predicting the markets to reach somewhere between 1350 and 1400 in 2012 with earnings cresting $105 per share – any dissapointment in the economy and earnings caused by price pressures will be reflected in much lower asset prices. Caution is advised.