Import Prices Continue to Trend Higher

Although the market was expecting an increase closer to 1%, US import prices rose 0.7% in October. The underlying trend, however, is clear: Import prices have risen in all but two months thus far in 2009.

The fact that import prices are still off 5.7% from a year ago is reflecting the base effect of the collapse of import prices in the August-December period. Imported fuel costs are an important culprit. Excluding fuel (not just oil), imported prices rose 0.4% after a 0.5% rise in September.

The price of imported capital goods rose 0.2%, while consumer goods, excluding autos, rose 0.3%. The price of imported autos and parts rose 0.6%, marking the largest gain since late 2007. Expectations are for both headline and core PPI and CPI to increase based on today's import data when the price indices are reported next week.

Geographically, the cost of goods from China increased by 0.1% and goods from Japan increased by 0.2%. Goods purchased from the EU rose 0.6%, while goods from Canada rose 1.2% and goods from Latin America rose 1.4%.

One of the key ways that a depreciating currency impacts an economy is through imported inflation. There has been much work done on what economists call "pass-through" and how it is far from perfect. Three important issues are: 1) companies from Asia and Europe often compete in terms of market share rather than profit margin and therefore may be reluctant to pass on the full currency change; 2) 30-50% of the final price of an imported good may be derived from domestic costs -- storage, transportation and marketing; and 3) most goods the US imports are invoiced in dollars.

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