Import Prices Trend Higer

US import prices rose 0.7% in October. The market was expecting an increase closer to 1%. However, the underlying trend is clear. Import prices have risen in all but two months thus far in 2009. The fact that imported prices are still off 5.7% from a year ago is reflecting the base effect of the collapse of import prices in the Aug-Dec period. Imported fuel costs are an important culprit. Excluding fuel (not just oil), imported prices rose 0.4% after a 0.5% rise in Sept.

The price of imported capital goods rose 0.2%. Consumer goods, excluding autos, rose 0.3%. The price of imported autos and parts rose 0.6%, the largest gain since late 2007. Expectations both headline and core PPI and CPI may increase based on today's import data. Both of these price indices will be reported next week.

Geographically, goods from China increased by 0.1% and goods from Japan increased by 0.2%. Goods purchased from the EU rose 0.6%. Goods from Canada rose 1.2% and while goods from Latam rose 1.4%.

One of the key channels by which a depreciating currency impacts an economy is often through imported inflation. There has been much work done on why what economists call "pass-through" is far from perfect. Three important ones are: 1) companies from Asia and Europe often compete in terms of market share rather than profit margin and therefore may be reluctant to pass on the full currency change; 2) 30-50% of the final price of an imported good may be derived from domestic costs--storage, transportation and marketing, 3) most goods the US imports are invoiced in dollars.