In July, US import prices rose by 0.4%, exceeding the anticipated 0.0% increase. Previously, import prices had seen a 0.1% rise. On a year-over-year basis, import prices remained steady at -0.2%, the same as the prior statistic.
Export prices went up by 0.1% for the month, aligning with predictions, contrasting with the earlier rise of 0.5%. The increase in import prices was due to higher costs in both nonfuel and fuel imports.
Reconsidering the Disinflation Narrative
The unexpected 0.4% jump in July’s import prices forces us to reconsider the prevailing disinflation narrative. This single data point, driven by both fuel and nonfuel costs, suggests underlying price pressures may be stickier than anticipated. Consequently, the Federal Reserve’s path to potential rate cuts now looks more complicated.
This data is more concerning when we see Brent crude has recently climbed back above $85 a barrel, directly impacting the fuel component of prices. Furthermore, this aligns with last week’s retail sales report that showed a surprising 0.5% jump, suggesting strong consumer demand is still pulling in higher-priced goods. We will be watching to see if this pressure feeds directly into the next Producer Price Index reading.
We recall the steady disinflation seen throughout the second half of 2024, which had cemented expectations for a Fed pivot. This new data forces a repricing of rate cut expectations, pushing them further out. Traders should now anticipate a flatter yield curve and consider strategies that benefit from higher short-term rates, such as selling SOFR futures contracts.
Impact On Equity Markets
For equity markets, the prospect of higher-for-longer interest rates could act as a headwind, particularly for growth-sensitive sectors. Hedging long positions with put options on major indices like the S&P 500 may be prudent. This environment is also supportive of a stronger US dollar, making long positions in the Dollar Index (DXY) attractive against currencies with more dovish central banks.
