The Fed’s Inflation Puzzle: The Dollar Piece Changes Shape

The Federal Reserve may be wrong to think the dollar’s past strength will keep pushing inflation lower

By Justin Lahart

Shipping containers are seen at the Port of Los Angeles. The Labor Department said Tuesday prices for imports to the U.S. rose 0.2% in March from February.

Shipping containers are seen at the Port of Los Angeles. The Labor Department said Tuesday prices for imports to the U.S. rose 0.2% in March from February. Photo: Patrick T. Fallon
 
 
With the chill that U.S. prices caught from abroad coming to an end, inflation this year might do something it hasn’t done in a while: come in hotter than the Federal Reserve expects.

The Labor Department on Tuesday said prices for imports to the U.S. rose 0.2% in March from February. That still left them 6.2% below their level of a year earlier. Much of that annual decline was about oil, however.

Core import prices, which exclude food and fuels, were down 2.3%. And prices for nonautomotive consumer imports—stuff that ends up on store shelves—were down just 0.1% on the year. That was a far cry from the 1.1% annual decline they registered in August.

The relative firming in import prices indicates the combination of overseas weakness and dollar strength weighing on U.S. prices may have nearly run its course. That isn’t something expected by Fed policy makers, who project core consumer prices will gain just 1.6% this year.



Rather, say Goldman Sachs GS 1.51 % economists, the Fed seems to think much of the dollar’s strength last year has yet to show up in import prices. One reason for that may be that the economic models the Fed employs suggests the strong dollar should have had a more pronounced effect on prices than it has so far.

But the recent performance of consumer import prices weighs against the idea the missing pass-through from the strong dollar to inflation will show up with a lag. That doesn’t mean import prices are about to start jumping—there is still plenty of weakness overseas—but they won’t be as big a weight on inflation.

Combine that with job-market strength that gives consumers greater ability to spend, and the
Fed may be closer to reaching its 2% inflation target than it thinks.

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