Deflation Underway? Export and Import Prices Contract in May 2012

Written by Steven Hansen

There is only marginal correlation between economic activity, recessions and export / import prices. Prices can be rising or falling going into a recession. Econintersect follows this data series to adjust economic activity for the effects of inflation where there are clear relationships.

However, in May 2012 – the unusual event of both import and export prices showing year-over-year deflation warrants a closer look historically into this index.  Export / Import prices have deflated several times without a recession occurring – however, deflation is a recession warning flag.

The story remains the continually moderating year-over-year inflation – however, this moderating cycle should shortly end. Exports are down 0.1% year-over-year and imports down 0.3% (up 1.0% if oil is excluded).

May 2012 export prices fell 0.4% month-over-month while import prices fell 1.0%. The May’s in import prices was mostly due to decline in price of fuels, while the fall in export prices was driven by agriculture products.

According to the press release:

All Imports: The price index for overall imports fell 1.0 percent in May, the largest one-month drop since the index declined 1.2 percent in June 2010. Prices for U.S. imports also decreased over the past 12 months, falling 0.3 percent, the first year-over-year decline for the index since import prices fell 5.6 percent between October 2008 and October 2009. The decrease over the May 2011-12 period was led by lower fuel prices which more than offset an increase in nonfuel prices.

All Exports: Export prices fell 0.4 percent in May after increasing 2.0 percent over the first four months of 2012. The May decline was driven by lower prices for nonagricultural exports, which more than offset increasing agricultural prices. Overall export prices edged down 0.1 percent between May 2011 and May 2012, the first 12-month drop in the index since a 3.6 percent decrease for the year ended October 2009. The 12-month decline was led by lower agricultural prices.

How moderate the price increases have been over the past year is obvious from the graphic below.

There are different rates of inflation occurring in the economy according to multiple measurements by a single agency (BLS):

Each rate of inflation is measuring a different pulse point, and each represents the breadbasket of costs / prices relative to that grouping. It should be pointed out that fuel import prices are up 0.1% year-over-year, and has a 24.1% weight in the import index.

Caveats on the Use of the Export / Import Price Index

Both import and export prices index values shown in this post is a weighted average for the the entire category of exports or imports. The BLS has many sub-categories relating to a particular commodity or goods. Econintersect using spot checks believes these subindexes are accurate.

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