Various releases of economic data show evidence of the increasingly global nature of economic activity. As the U.S. current account data shows, imported goods and services play a vital role in the way the American economy operates. Imports are on track to exceed $2 trillion in value for 2006. In comparison to the country's overall gross domestic product of $13 trillion, imports don't overwhelm the domestic economy, but they can have a marked impact on how certain sectors of the economy behave. In addition, imports play a key role for many large businesses. Some of the country's largest importers include consumer retailer Target
With recent declines in the value of the U.S. dollar in comparison to foreign currencies, there is great concern over the continuing ability of American consumers to be able to afford imported goods. The Bureau of Labor Statistics, which is responsible for compiling and presenting information about the consumer price index, also gathers data for use in its import price index. By understanding how the import price index is calculated and used by economists and other analysts, you can uncover helpful information that may guide your investment decisions.
The basic concept
Just as the consumer price index attempts to measure the prices that ordinary people pay for typical goods and services, the import price index measures changes in prices of goods and services that American businesses and consumers obtain from abroad. In order to gather information about current price levels and their relative importance to the U.S. economy, the BLS looks at a representative sample of forms called consumption entry documents. These forms are filed by the companies that physically import goods into the country as part of the customs process. In addition to using these forms, the BLS obtains information about imports of crude oil and other petroleum products from the Department of Energy, and it gathers data on fares for international passenger travel from airlines and their reservation systems. To supplement its information on goods, the BLS also looks at certain import-related services, including freight costs by air, crude oil tanker, and ocean liner.
The BLS then uses this raw price data to compile a number of price indices. The overall import price index is calculated by using the relative importance of each category of goods and services as a weight for the change of prices in that particular category. Because petroleum products represent a substantial percentage of overall U.S. imports, the BLS also releases indices that exclude petroleum products as well as other fuels. There are also component indices for general categories of imports, including foods, industrial materials, capital goods, motor vehicles, and consumer goods. Furthermore, separate indices break down prices by country of origin.
Changes in prices of imported goods have significant implications for the domestic economy. The data on consumer goods and motor vehicles have a direct impact on the prices consumers see at their stores. On the other hand, prices of other types of goods, such as capital goods and industrial materials, affect domestic businesses and their profitability. Depending on whether businesses choose to absorb additional costs by accepting lower profit margins or, instead, pass on higher costs in the form of price hikes, consumers may or may not suffer any consequences from price changes for imported goods that businesses use.
In addition, import price data also provides insight into how foreign exporters respond to fluctuations in currency exchange rates. For instance, over the past year, the value of the euro has risen from roughly US$1.20 to around US$1.30. Therefore, if a foreign company charged US$120 for a product last year, it could have exchanged those dollars for 100 euros. However, with the falling dollar, US$120 is now only worth about 92 euros. The foreign company can thus either accept the reduction in revenue or hike its price to US$130 to maintain constant revenue in euro terms. Because the import price index is measured in U.S. dollars, economists can see rising prices that closely follow changes in foreign exchange rates.
The current import price index report shows relatively benign levels of price increases for imported goods and services. Over the past year, prices of imports have risen by just 1.2%. Moderation in price levels of petroleum products accounts for much of this stability, with petroleum import prices rising just 1.5%. In contrast, import prices over the same period in 2004-05 rose 6.4%, due largely to the 26.4% increase in imported petroleum prices.
From the lack of big import price moves, it's apparent that foreign exporters are choosing not to charge higher prices for goods to make up for currency-related losses. The corresponding export data, on the other hand, suggests that domestic shippers that export goods and services abroad are reaping the benefit of a weaker dollar, perhaps by keeping prices constant in foreign currency terms. Export prices are up nearly 4% from last year's levels, with agricultural commodity prices up more than 10%. Despite the fears of many over the falling value of the dollar, a falling currency can be very beneficial to exporters.
Looking at prices for imports from various countries, it's interesting to see a clear division among the countries of the world. In general, the prices charged for imports from Europe, Mexico, and Latin America have all gone up at fairly high rates. On the other hand, prices for imports from Canada and most Asian countries have fallen or remained stable. This may result from the fact that most of the dollar's weakness over the past year has been against the euro and other European currencies, while exchange rates with Asian countries have remained close to unchanged over the past year.
In summary, the import price index helps economists in a number of ways. By pinpointing areas of price sensitivity in imports, it can help predict future inflationary pressures within the domestic economy. In addition, by looking at detailed information by industry and country, investors can focus on promising industries that may hold the best potential for investment gains.
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Fool contributor Dan Caplinger is hoping for low import prices to continue as he starts thinking about buying some electronic equipment. He doesn't own shares of the companies mentioned in this article. Home Depot is an Inside Value pick. The Fool's disclosure policy is good in any country.