What’s Up with Import Prices?

Some people may find this morning’s release of the March import price data by the BLS a bit puzzling. It shows that, excluding oil, the price of imported goods into the US hasn’t really been rising – it has gone up by just 1.0% in the past 12 months (between March 2003 and March 2004). In fact, the rate of import price inflation has actually fallen rather than risen over the past year – despite the fact that during that time period we’ve seen a dramatic decline of the dollar against most major currencies, which one might expect should make imported goods more expensive. This data therefore throws some cold water on the expectations of people who think that a weaker dollar should, by causing imports to become more expensive, reduce US imports and thus help improve the US’s trade balance.

There are a couple of possible explanations. One is simply that the exchange rate hasn’t really changed against the US’s major trading partners. There’s some truth to that idea, since the dollar hasn’t weakened against China or Mexico. Nevertheless, it has weakened against many of the US’s largest trading partners, like Canada, the U.K., and Germany, so we would still expect to see some effect. (On a trade weighted basis, the dollar is still down by about 15% over the past year.)

A second possibility is that prices may be falling in some countries that we import a lot from. This may actually be true in some places like Germany and Japan. (Karsten, any comments?) The weaker dollar would then simply counteract import prices that would otherwise be falling. A third explanation is that firms selling imports in the US (note that these include both foreign firms like Toyota, and domestic firms like Wal-Mart) are accepting lower profit margins in order to maintain US market share. There’s a long history of this happening in the US (especially in the late 1980s), so this would come as no surprise if it’s true.

Regardless of the explanation, however, the result is that we should not expect to see US imports slowing down any time soon.