Import Price Index

The Import Price Index measures prices American consumers pay for imports. Export Price Index measures prices American producers charge for exports. Every month, the Bureau of Labor Statistics collects net transaction prices for more than 20,000 products from over 6,000 companies and secondary sources. These prices are then weighted according to the relative importance and are not seasonally adjusted. Changes in import and export prices gauge inflation here and abroad. Inflation leads to higher interest rates, and the bond market is especially sensitive to the risk of importing inflation because it erodes the value of the principal paid back when the bond matures. Inflation also decreases the value of the steady stream of interest rate payments on this type of security. Since imports make up roughly 15% of the goods purchased in the U.S., changes in import prices impacts inflation. In addition, prices of imports affect the profitability of U.S. firms competing with the cheaper or more expensive imports. Export prices are an indicator of the demand for U.S. goods abroad, and thus provide information about economic conditions abroad. One drawback is this index assumes a fixed market basket of goods. This index currently uses 1995 as the base year. Thus, each category of goods is assumed to make up the same percentage of expenditures as it did in 1995. This can lead to distortions between the true price change and the reported price change. Another problem is Import and Export Prices are directly influenced by exchange rate fluctuations with a lag created by advance orders contracts. This makes interpretation of these indices more complex. The Import Price Index is scheduled for release at 7:30 (CST) around the 12th of the every month by the Bureau of Labor Statistics.

POTENTIAL IMPACT ON INTEREST RATES: LOW