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November 2006, Vol. 129, No. 11

Import price rise in 2005 due to continued high energy prices

Jeffrey Bogen

Import prices rose 8.0 percent in 2005—the fastest pace since 1987 and the fourth consecutive annual increase—following an increase of 6.7 percent a year earlier. Excluding energy goods, import prices rose a comparatively modest 1.1 percent following a 3.0-percent increase a year earlier. Export prices rose 2.8 percent, also the fourth consecutive annual increase, but a smaller increase than the 4.0-percent increase in 2004. Excluding agricultural products, export prices rose 2.6 percent following a 5.0-percent increase a year earlier.

Although hurricanes Katrina and Rita caused price surges for products ranging from building materials to petroleum-based chemicals, these shocks appear to have been only short term.¹ The more noteworthy story in 2005, however, was the continuation of rising prices for energy and raw materials. Import energy prices, which rose 43.5 percent, had a substantial impact on overall import prices as energy products made up 13 percent of all imports.²

Exchange rates also affected import prices and were reflected in the Locality of Origin price indexes. These price indexes measure price fluctuations of imported products aggregated by the country or region from which they were imported. This aggregation method allows analysts to study the effects of exchange rates on import prices. The European Union (EU) price index of manufactured goods and the Japanese price index, which ended 2005 up 1.8 percent and down 0.7 percent, respectively, increased early in the year due to a comparatively weak dollar, but declined in the second half of the year as the dollar strengthened. By the end of the year, the dollar had appreciated 10.2 percent against the euro and 13.1 percent against the Japanese yen.³ In contrast, the U.S. dollar depreciated 1.3 percent against the Canadian dollar in 2005. The strong Canadian dollar, along with higher energy prices, contributed to the 11.1-percent increase in the Canadian price index.⁴

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Footnotes
1 Timothy Aeppel and Steve LeVine, "Hurricanes Has Mixed Impact on Profits, Depending on the Industry," The Wall Street Journal, Feb. 6, 2006, p. A3.

2 The weights used in calculating the import and export price indexes are updated annually, though with a 2-year lag. Thus, the 2005 import and export indexes were calculated with weights based on trade dollar values from 2003. For this reason, this figure was based on 2003 trade dollar values.

3 Exchange rates quoted in this article compared December 2004 with December 2005 using data from the Pacific Exchange Rate Service. On the Internet at http://fx.sauder.ubc.ca/data.html (visited July 20, 2006).

4 The relationship between U.S. and Canadian currencies can affect import and export prices because Canadian goods represented 17.2 percent of all imports to the United States in 2005, based on trade dollar value, more than any other nation. Canada also consistently ranks as the top trading partner of the United States. Data were obtained from the United States Census Bureau’s Foreign Trade Statistics. On the Internet at http://www.census.gov/foreign-trade/statistics/highlights/top/top0512.html (visited June 21, 2006).

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