Which Impacts Prices Most: Import Costs, Imported Petro or Money Supply? The Answer Might Surprise You

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Contrary to popular belief, low-cost imports do not necessarily drive down the prices of consumer goods. An American Institute for Economic Research (AIER) analysis finds that the Consumer Price Index (CPI) declined even as the cost of Chinese imports increased. Rising imports' costs from Latin America, Canada, and Europe, as well as petroleum imports, have scant impact on consumer prices. Increases in the money supply however – which more than doubled between 2000 and 2012 – have had a greater impact on prices than the cost of imported goods.

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"Each 1 percent increase in the cost of imported goods scantly impacted the Consumer Price Index when compared to to the impact made by the growth in the money supply. Most suprisingly, the CPI declined even as the cost of Chinese imports increased."

Contrary to popular belief, low-cost imports do not necessarily drive down the prices of U.S. consumer goods, the American Institute for Economic Research (AIER, http://www.aier.org) found in a recent analysis. What does affect prices, the independent think tank found, is the rate of growth in the money supply.

The analysis, which was based on data collected by the Bureau of Labor Statistics since December of 2003, found the following:

  •     CHINESE IMPORTS: The Consumer Price Index (CPI) declined even as the cost of Chinese imports increased. Each 1 percent increase in the cost of Chinese imports, AIER economists found, was accompanied by a 0.14 percent drop in the CPI.
  •     CANADIAN IMPORTS: Canada is the U.S.’s largest trading partner. Price increases of Canadian goods had an almost negligible impact on the CPI, with each 1 percent increase of Canadian imports accompanied by a 0.007 percent increase in the CPI.
  •     LATIN AMERICAN IMPORTS: Each 1 percent increase in the cost of Latin American imports, meanwhile, was accompanied by a very modest 0.04 percent increase in the CPI.
  •     EUROPEAN IMPORTS: Each 1 percent increase in the cost of European imports, the analysis found, resulted in a 0.11 percent increase in the CPI.
  •     OIL IMPORTS: Even the price of petroleum imports appeared to have less impact than people assume, with each 1 percent increase in the price of petroleum-related imports resulting in a mere 0.02 percent increase in the CPI.

What did have a clear cause and effect relationship, AIER found, was the money supply. “The fact is that increases in the money supply – which more than doubled between 2000 and 2012 – have a greater impact on prices than the cost of imported goods,” said Dr. Steven Cunningham, AIER Director of Research and Education.

  •     MONEY SUPPLY: The AIER analysis found that a 1 percent increase in the growth rate of the money supply was followed almost immediately by a 0.19 percent increase in the CPI.

“Ultimately, this means that the U.S. can’t look to cheap import prices to control domestic inflation,” said Cunningham. “With a huge wall of money waiting to flood the economy, the U.S. needs to find its own measures to control inflation.”

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Founded in 1933, the nonprofit American Institute for Economic Research (AIER) conducts independent, scientific, economic research to educate individuals, thereby advancing their personal interests and those of the Nation.

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