Widening trade deficit another spur to inflation

By Courtney Schlisserman  |   2008-7-7  |     NEWSPAPER EDITION

THE US trade deficit probably widened and the cost of imported goods jumped, underscoring how the surge in oil prices is hurting growth and igniting inflation, economists said before reports last week.

The gap between imports and exports grew to US$62.4 billion in May, the widest in almost two years, according to the median estimate of economists surveyed by Bloomberg News. The import price index climbed 2 percent last month, the poll showed.

Increasing fuel expenses indicate companies will keep cutting payrolls and trimming equipment purchases to maintain profits. At the same time, more expensive foreign goods will open the way for US businesses to also raise prices, signaling inflation may not ebb as the Federal Reserve had projected.

"It is becoming untenable for policy makers to ignore the mounting threat of rising prices at home," Joseph Carson, director of global economic research at AllianceBernstein in New York, said in a note to clients. Inflation from overseas "gives US firms the added flexibility of passing along cost increases to consumers without undermining their competitive position."

Primary reason

The Commerce Department is scheduled to release the trade report on Friday. The Labor Department will issue June import price figures at the same time.

The price of crude oil futures has risen 50 percent this year and reached a record US$145.85 per barrel last Thursday.

The increase in petroleum was a primary reason for the widening of the trade gap in April. After eliminating the influence of prices, the trade deficit shrank that month to the lowest level since August 2003, as exports grew. The after-inflation trade numbers are the figures used to calculate gross domestic product.