Some thoughts on what to make of the trade and export/import price releases.
First, a recap of what’s happened to the nominal value of the dollar, both against a broad basket of currencies, and against the major currencies.
Figure 1: Nominal value of the dollar against a broad basket (blue), and against a basket of major currencies (red), in logs, rescaled to 0 in 2002M01. NBER-dated recessions shaded gray. Source: Federal Reserve Board via FRED II, NBER.
Now, in the wake of the export/import price release, there was some hand-wringing about inflationary pressures arising from increasing import and export prices . My first comment is that higher import and export prices are exactly what would be expected from exchange rate depreciation. Taking the 40% pass through coefficient that I use as a rule of thumb (which one can take issue with, see , ), one should expect rising tradables prices, although the changes that have occurred since 2002M01 are a bit on the higher end, especially for exports (implied pass through of about 65%).
Figure 2: Nominal dollar exchange rate against a broad basket of currencies (blue), price of goods imports ex. oil (red), and price of goods exports ex. agricultural commodities (green) in logs, rescaled to 0 in 2002M01. NBER-dated recessions shaded gray. Source: Federal Reserve Board via FRED II, BLS release of 15 February 2008, NBER, and author’s calculations.
One caveat is that typical estimated pass through coefficients are of the nature of “partial derivatives”, whereas looking at pictures such as Figure 2 yields a “total derivative”.
Returning to the point that of higher tradable goods prices, it’s important to recall that this is part of the expenditure switching process — tradables prices have to rise relative to the price of the general consumption bundle in order for the trade balance to shrink, holding all else constant.
The non-oil trade balance continues to shrink (Figure 3), and indeed, I was surprised by the bump up in nominal exports in December. But one shouldn’t get too excited — one’s got to keep the big picture in mind. In particular, while real goods imports ex oil are shrinking noticeably, real goods exports ex agricultural commodities are right on trend (Figure 4).
Figure 3: Nominal trade balance (blue), nominal trade balance (red), in millions of USD per month. NBER-dated recessions shaded gray. Source: BEA/Census release of 14 February 2008, and NBER.
Figure 4: Real goods exports (blue), 2003-07M12 trend (green), and real goods imports ex. oil (red), in millions of 2000Ch.$ per month. Source: BEA/Census, release of 14 February 2008.
(As an aside, the oil import bill is likely to rise in January, given that the price of petroleum imports rose 5.4% in log terms in that month, compared to the 1.9% decline recorded in December. See also Brad Setser’s post on the impact of oil on the deficit)
One last observation. We wanted the Chinese yuan to appreciate against the dollar, in part to induce an increase in prices of Chinese imports. It seems that we’re getting our wish, insofar as those prices are concerned (Figure 5).
Figure 2: Price of goods imports from East Asian NICs (red), and price of goods imports from China (blue) in logs, rescaled to 0 in 2004M01. NBER-dated recessions shaded gray. Source: BLS release of 15 February 2008, NBER and author’s calculations.
So when you hear complaints about the rising price of Chinese imports (which seems somewhat overwrought ), remember this is part of the process of “global rebalancing”. It, too, should not be a surprise.
- Exchange rate pass through seems a little higher than that exhibited in recent history, although confirmation awaits formal econometric estimation.
- Tradables prices should rise, and should rise relative to the overall price level. Rising tradables prices should more plausibly interpreted as a manifestation of monetary policy-induced inflationary effects, rather than a cause of inflation, unless the rising prices are caused by rising costs in the exporting countries.
- The export surge is not so evident in real terms, insofar as goods are concerned.