Cost of U.S. imported goods sink in June, but drop won’t last once tariffs start

The cost of many imported goods are expected to rise in the coming months if trade tensions between the U.S. vs. China and other countries worsens. That could add to rising inflation at home.

The numbers: The cost of import goods fell sharply in June to mark the biggest drop in about a year and a half, though the respite might be short-lived amid worsening trade tensions between the Trump White House and other countries.

The import price index sank 0.4%, the biggest decline since February 2016.

Excluding fuel, import prices dropped 0.3%, .

The import price index itself might not reflect tariff-related prices increases since they are stripped out the equation. The added burden of tariffs will mainly show up in the producer and consumer prices indexes.

What happened: The cost of imported oil and natural gas declined in June. Oil prices are likely to show an increase next month, but natural gas might not. They’ve been on the softer side recently.

The cost imported foods, consumer goods and autos also declined. That could be a result of foreign suppliers trying to ship lots of goods to the U.S. before tariffs kicked in. Or they might have lowered prices ahead of the pending tariffs to keep costs down for end-use customers.

What may have also pushed import prices down is a stronger dollar. A stronger dollar makes it cheaper for Americans to buy foreign goods.

“A stronger dollar has a depressing effect on imports prices, especially for consumer goods,” noted Gregory Daco, chief U.S. economist a Oxford Economics.

Big picture: Inflation has shot up over the past year owing to rising oil prices, higher rents and more expensive medical care, among other things. Higher labor costs and worker shortages are also contributing.

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The cost of imports have been adding upward pressure to inflation and the problem could get worse once tariffs go into affect on billons of dollars of Chinese and other foreign goods.

Even before tariffs took effect, the yearly rate of import inflation totaled 4.3% in June — close to the fastest pace in almost seven years.

While tariffs are not included in the import price index, the threat of a trade war has pushed up the global cost of key materials such steel. The higher market prices for goods could end up in the index.

What they are saying? “It is still too early to see the direct effect of the first round of trade tariffs on China in this report, although once the tariffs start feeding through, import prices are likely to reflect them first,” economists at Barclays said.

Market reaction: The Dow Jones Industrial Average and the S&P 500 opened modestly higher on Friday trades.

The stock market has been gyrating up and down in the past few months amid worries about a widening trade war. Both indexes have receded from record highs set earlier in the year.

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The 10-year Treasury yield was little changed at 2.85%. After reaching 3.1% last month, the yield has also fallen in response to growing trade tensions.