Tuesday, May 10, 2011

Imported goods prices rise as the dollar falls

This morning the BLS reported that April imported goods prices were 11.1% higher than a year ago. Excluding petroleum, import prices were up 4.3% year over year. So it's not just oil prices that are moving up, it's all prices. And the common denominator behind all imported goods prices is the dollar, whose value has been declining since 2002.

The two charts above tell the story. The top chart shows an index (nsa) of all imported goods prices ex-petroleum. The bottom chart is a popular measure of the dollar's value against other currencies. Note how the two lines tend to move in opposite directions: the rising value of the dollar from 1995 through 2002 corresponded to a decline in imported goods prices; while the falling dollar from 2002 on has seen a substantial rise in imported goods prices.

This simply illustrates the obvious fact that a weak currency inevitable results in more inflation. If the dollar were to continue to decline, then imported goods prices would continue to rise and eventually all prices would rise.


Benjamin Cole said...

If I read the ex-petroleum chart correctly, imported goods prices were at 100 at start of year 2000, and now are at 115.1.

That works out to a compounded annual inflation rate of well under 1.5 percent.

Besides, current core overall USA core CPI inflation is running under target rate of 2 percent.

If we wish to have a core CPI at the target 2 percent, the Fed should ease up on the money supply, or engage in QE3.

I just don't understand the current mania for extremely low inflation rates. The USA economy thrived through the 1980s and 1990s with moderate inflation rates, but higher than those of now. And we are climbing out of a recession now--higher inflation should be tolerable now, in exchange for real growth. And we have been below target inflation rates for three years--we have ground to make up.

TradingStrategyLetter - Weekly Summary said...

The 'mania' for low interest rates have been generated by our fearless political leadership (both parties) who have saddled the treasury with a $15T deficit - and cannot handle interest rates any more than zero!

Raise rates to a 'normal' 5 percent and see how fast the economy slips back into a double dip nightmare!It will make ")& look like a walk in the park!

TradingStrategyLetter - Weekly Summary said...

... and see how fast the economy slips back into a double dip nightmare! It will make 2007-08 look like a walk in the park!