Narrower Trade Gap May Spur Inflation

For the U.S. economy, trade is providing both good and bad news: It is making a strong contribution to growth but is also fueling inflation.

The trade deficit shrank 0.6% to $56.45 billion in September, compared with August's $56.8 billion gap, which was revised down from $57.59 billion, the Commerce Department said.

The narrowing reflects strong global growth that is boosting demand for exports and a smaller-than-expected bill for imported oil. The lagged effect of the weakening dollar may also be playing a role: It tends to make U.S. exports cheaper, when denominated in foreign currencies, boosting their sales, and to make imports more expensive, reducing their demand.

The narrowing of the trade deficit surprised some economists, who had predicted that higher oil prices would push up imports and widen the trade deficit. But record oil prices damped demand for imported and petroleum products in September. The nation's bill for crude-oil imports was $20.38 billion, down from $21.73 billion in August.

In a separate report from the Labor Department, data showed some evidence that the weak dollar was affecting the price of imports. Import prices rose 1.8% in October after rising 0.8% in September, the department said. In the 12 months ended in October, import prices rose 9.6%, almost double the 5% rate for the 12 months ended in September.

Petroleum import prices rose 6.9% in October compared with September, and were up 41.4% from October 2006. Prices in key sectors such as capital goods and consumer products were tamer. Overall import prices excluding fuels rose 0.3% in October and are up 2.4% over the past year. Prices for imports from China jumped for a sixth consecutive month and are up 2.2% in the past 12 months.

Rising import prices could fuel inflation, one factor behind the Federal Reserve's apparent view now that it is finished cutting interest rates.

Separately, sentiment among consumers continued to slide in November. Consumer sentiment hit 75.0, down from October's reading of 80.9, according to a survey released by Reuters and the University of Michigan.

Because trade deficits subtract from U.S. gross domestic product, the lower-than-expected gaps in August and September indicate the U.S. economy likely grew even faster than thought. The government, in its first estimate for third-quarter GDP, said the economy expanded at a 3.9% annual rate.

Some economists think third-quarter GDP growth will ultimately be revised to about 5%, though they expect a sharp slowdown in the fourth quarter. The government will release more closely watched U.S. producer- and consumer-price data this coming week.

Source - WSJ