Import prices drop 0.3% in May — cost of Chinese imports falling amid tariff fight

  • 14-Jun-2019
  • Import prices drop 0.3% in May — cost of Chinese imports falling amid tariff fight

The cost of imports fell in May for the first time this year, reflecting a decline in the prices of most foreign-made goods including those coming from China that have been hit with U.S. tariffs.

The import price index dropped 0.3% last month, the government said Thursday. Import prices fell by the same amount even if fuel is excluded.

Import prices have dropped 1.5% in the past 12 months, matching January for the largest decline since the fall of 2016. By contrast, import prices were rising at a 4.5% annual clip a year earlier.

The dwindling cost of imports is helping to suppress price pressures in the U.S., giving the Federal Reserve more leeway to cut interest rates if the economy weakens any further. The rate of inflation is hovering around 2% — the Fed’s target — and shows little sign of budging.

What happened: The cost of fuel imports sank 1% last month, partly reversing a big increase in the first four months of the year when oil prices surged. Oil prices have since backed off.

It wasn’t just oil and gas, however. The cost of foods, industrial supplies and most other foreign goods also declined in May.

Similarly, the price of U.S. exports are declining. Export prices dipped in May and have fallen almost 1% in the past year.

Big picture: Part of the decline in import and export prices are the result of a slower global economy that’s crimped demand. A strong dollar DXY, +0.06%  has also hurt U.S. exporters.

The ongoing trade battle between the U.S. and China has taken a toll, too. The import price index does not include the cost of tariffs, but falling prices of Chinese imports may be a sign that Chinese suppliers have cut prices to retain market share.

The cost of Chinese imports — importantly, excluding tariffs — have dropped 1.4% in the past year.

Many factors are at work, however, and it’s hard to separate out the effect of tariffs. The Chinese currency CNYUSD, -0.0318%  has declined in value relative to the dollar, for one thing, and that could also be making Chinese imports less expensive.

The prices American exporters fetch for goods sold in China, meanwhile, have declined even more steeply. They sank 1.4% in May and are down 4.3% in the past year.

American farmers have been especially hard hit, especially those that produce soybeans. Agricultural export prices have slumped 5.3% in the past 12 months, the largest drop in three years.

Market reaction: “The trade war has taken a toll on global growth and commodity markets,” said Thomas Simons, senior money market economist at Jefferies LLC

“Import prices (which don’t reflecting tariffs) were broadly lower, indicative of slower global growth,” wrote chief economist Scott Brown in a note to clients.

Market reaction: The Dow Jones Industrial Average DJIA, +0.39% and S&P 500 SPX, +0.41% rose mildly in Thursday trades. The 10-year Treasury yield TMUBMUSD10Y, -0.51% was little changed at 2.12%.

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