import and Export Prices

Impact: High
Data: Bureau of Labor Statistics
Release time: Between 12th and 15th of the month following the survey
Frequency: Varies
Source: Bureau of Labor Statistics
Revisions: Monthly
A price index tracks purchasing power by measuring how the price of goods and services is changing. The export and import price indices are used to show the value and prices of goods and services getting into and out of the U.S. market. The index uses a benchmark approach, similar to the CPI, to measure the change in U.S. dollar prices of goods or services purchased from abroad by U.S. residents as well as the goods and services sold to the foreign market from the U.S.
How important is it?
Although it is a backward looking indicator, export and import prices have a big influence in the interest rates, the economy as well as the stock and bond markets. This is because import and export prices are a clear indication of the economic performance of U.S products and services both locally and abroad.
The export and Import Price Index is also important since it is used to help gauge the impact on inflation from changes in the value of the U.S. dollar. It has an inverse relationship, whereby a lower dollar typically leads to higher import inflation, and vice versa. The impact occurs with a lag, which can vary by industry from a few months to a few years. Although the index has two segments thus the export and import segments, less attention is paid to the export portion since it does not feed into overall U.S. inflation rates.
How is it calculated?
It is calculated using a benchmark approach that compares a household's cost for a specific basket of finished goods and services with the cost of the same basket during an earlier benchmark period (reference base, which is the average index level for 1982-84). The weight given to each basket item is fixed.
How does it affect the forex?
Stocks and bonds typically fall in reaction to higher-than-expected price index readings (inflation), more so when the economy is growing above its potential. This happens because undesirable rates of inflation can hurt the valuation of stocks and bonds, a situation that may create the perception that the Federal Reserve Bank is likely to raise interest rates. Such imaginations in the investment fraternity may eventually result to a slow down in economic activity.
On the other hand, lower-than-expected price index readings can lift the prices of stocks and bonds, even though there are acceptable limits with stocks. Rising bond prices and falling bond yields may enhance the relative attractiveness of stocks. However, stocks can suffer if price index readings keep declining, especially if the economy is growing below its potential because it implies slower corporate profit growth as consumers postpone purchases. In a situation where import prices prove to be far more than export prices, the current account balance may experience deficits leading to a drop in the dollar value. If such situations persist, then the international demand for the dollar may decline with investors viewing it as a weak currency. This may further affect the overall trends in international trade of goods and services.
How does it affect the stock market?
Investors at the stock market generally watch this index as it gives an insight into the trend of the market in days to come. If the index balances well in favor of any sector, investors are likely to shift their attention to the said, sector and raise its share price due to increased demand. Since the import and export index is influential in setting up the country’s monetary policy, it is quite advisable for any investor to keep track of the events in order to make strategic investment decisions before the Federal Reserve Bank takes any measures that may affect your profits in a negative way.
Federal Reserve Bank interest rates are adjusted in respect to these indices, factor which makes investors to consider it as a main indicator on the trends of interest rates to come. It is wise to calculate your investment earnings against the inflation or existing interest rates since at times high interest rates may mean you end up getting far much less than you had anticipated. Such circumstances may force investors to sell their holdings in stock and buy bonds and vice versa to counter any effects that may be brought about by the changes in interest rates.