INDICATOR: April Import and Export Prices

KEY DATA: Imports: -0.5%; Nonfuel: -0.2%; Exports: -0.7%; Farm: -2.2%

IN A NUTSHELL: "With the price of imports basically going nowhere, consumer inflation should remain tame and that is good for both households and the Federal Reserve."

WHAT IT MEANS: Import prices fell sharply in April led by a large decline in petroleum costs. But households are being helped in other ways as even excluding fuel, imports cost less. Food prices were down, though the cost of fish rose sharply again. Eating healthy is beginning to cost a lot more. Imported vehicle prices were flat again but other consumer goods costs rose, especially for nondurable manufactured products. That is surprising given the upward drift in the dollar. I would have expected more competitive pricing from foreign companies. Durable manufactured product import prices are still falling, though. As for exports, I suspect the farm sector is watching with horror as their prices are dropping rapidly. There was a large decline for the third month in the last four.

In a separate report, the National Federation of Independent Businesses index rose solidly in April. Unfortunately, the level of optimism is hardly pointing to irrational exuberance. The small business sector does not look like it is participating in the earnings orgy being feasted on by larger companies.

MARKETS AND FED POLICY IMPLICATIONS: This report is good news on many fronts. With import costs under control, it will be difficult for U.S. firms to raise prices so we should see good consumer price reports. The Producer Price Index is released tomorrow and the Consumer Price Index on Thursday and they should signal limited inflationary pressures as well. That means households should be able to stretch their budgets a little more. That is already occurring, as retail sales were solid when you backed out the decline in gasoline that was due to the fall in prices. In addition, the small business sector may be getting better but is not in good shape. Only a broad based recovery will provide the pricing power for higher inflation and that will be signaled by a solid small business component, which we don't have yet. Consequently, those who are fearful that the Fed's pedal to the metal approach will lead to inflation can chill for a while longer. Inflation is not likely to be a driver for any change in policy for quite some time.