Retreating US import prices relieve pressure on inflation

An ongoing decline in the cost of bringing goods into the US is poised to continue, easing a key pressure on broader inflation.

Prices for imports declined 4.4% year over year in July, according to the latest data released Aug. 15 by the US Bureau of Labor Statistics (BLS). Prices for US imports and exports increased throughout most of 2021–2022, driven by strong demand for consumer goods and overburdened supply. However, since the beginning of 2023, both export and import prices have seen significant — in some cases, historic — declines.

Rising interest rates and tighter credit conditions have dampened domestic demand for imported goods, leading to the price decline for imports and slowing overall inflation, which has more than halved from its 2022 peak. Import prices are likely to keep falling, offering further relief as the US Federal Reserve continues its fight to bring consumer inflation under further control.

"[Imports don't account for] the majority of spending that consumers do, but it is a nice healthy chunk. It certainly doesn't hurt that import prices are falling; overall, import prices declining would help subdue inflation in the US," said Katheryn Russ, professor and chair of economics at the University of California, Davis (UC Davis).

Inflation moderating

Overall inflation rose 3.2% from July 2022 to July 2023, according to the latest government data. That is down from the recent peak of 9.1% in June 2022. Imports constitute a substantial portion of the consumer price index, particularly in apparel and new cars, according to the BLS.

Inflation excluding volatile energy and food prices — the so-called "core" inflation metric closely watched as a gauge of price trends — was up 4.7% over the same time frame before a seasonal adjustment. Month over month, both indexes ticked up by less than 0.2% in July, painting an encouraging picture of disinflationary pressures.

Falling import prices were key to driving both headline and core inflation lower, said Patrick Newport, executive director of US economics, and Michael Zdinak, a US economics director, both with S&P Global Market Intelligence.

"If import prices were rising, all other things equal, goods inflation would rise," Newport and Zdinak said. "The cost of transporting those goods — i.e., oil and gas prices — as well as domestic demand for the goods and the available supply of shipping containers all drive import prices."

While import and export prices were mostly falling for similar reasons, export prices were also dropping due to softer demand from countries fighting inflation with higher interest rates, the economists said. Market Intelligence forecasts declining import and export prices over the next two years.

Impact on consumer prices

Prices for imported goods function as headwaters to domestic inflation through two distinct channels, leading to varying timelines before lower prices are felt by consumers, said Russ with UC Davis.

"The more immediate [effect] stems from declines in final goods prices. When those goods hit the dock, and the prices are lower, that feeds right into retailers' prices," Russ said.

Intermediate goods comprise the second stream, which tends to carry a more significant lag before any effect on consumer prices can be detected.

"When the cost of these intermediate goods declines, the cost of production for US producers declines, and they can pass that on to consumers," Russ said. "The same issues with market power along the wholesale and retail chain apply, but that is a second channel through which we might see declining import prices feed into lower prices for consumers."

China in focus

Market Intelligence forecasts that the value of US imports and exports will fall in 2023 from a peak in 2022. Import prices for goods have been declining overall. But particular attention is being paid to trade flows with China, one of the largest trading partners with the US, amid strained relations between the two countries.

US terms of trade with China, which measure the purchasing power of exports relative to imports, fell 6.7% from July 2022 to July 2023. Import prices from China have been declining steadily since October 2022, according to BLS data. In 2023, July's 2.3% drop in import prices from China was the largest 12-month decrease since November 2009. Prices of exports to China have also fallen, registering an 8.8% year-over-year drop in July.

Export controls instituted by the US on advanced technologies are also changing the landscape for global trade, though the exact extent of their impact is yet to be determined, said Russ.

"Both US imports and exports of advanced technology products with China are subdued relative to last year," Russ said. "That isn't the case with the world as a whole, so it does seem that there may be some shift going on in where the US is sourcing these products."

Although the US has increased its reliance on some trade partners in recent years, China's importance for US supply chains is unlikely to fall off a cliff anytime soon, said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics.

"Trade between China and the US is slowing down dramatically compared to the pace of US trade overall," Lardy said. "There can be some reorganization of supply chains at the margin, but the dependence of multinationals on China is very deep and will remain important."