We know that over-inflationary pressures on consumption are very bad for the economy, as this will stain on the demand condition, which can be looked at through three main economic indicators, such as the consumer price index (CPI), producer price index (PPI), and personal consumption expenditure price index (PCE)—the FED’s preferred gauge. Yet, there are other leading indicators that many widely use, such as price from the international trade balance. Therefore, there is a saying that inflation could resurgence in 2025 from the new policies from President-elect Donald Trump on raising tariffs by over 20%. But how does this work?
Export and Import Price Index (EPI and IPI)
In a very simple term, an international trade of goods between two or more countries at certain prices is called an export and import price index. The Export Price Index (EPI) particularly tracks the prices of products a country exports to other nations, and vice versa for the import price index (IPI). So when businesses get their hands on this product, which could be a raw material or final product that needs to be distributed to other sellers, businesses have a right to set an additional price on this product in the next sale. When this happens, the final pricing product would be called for the consumer price index, or known for the inflation measurement.
So does this mean that both EPI and IPI are the same as the producer price index (PPI)?
While they could be relatable to some degree, they measure different aspects of price changes in the economy. The Producer Price Index (PPI) is simply concerned with the selling prices received by the domestic producer and is also included with the imported input (raw material, components, etc.). This also means that imported goods could be included when the producer used them for production. However, in the overall context, the EPI and IPI only measure the price that they import and export. And that is it.
How do we look into the data?
Both data are typically released once per month. If the export indices showed a positive increase, then this indicates increasing export prices and a potential for improving international trade. Exporters may see higher revenues, while importers may see inflationary pressures coming. If the export indices showed a negative increase, then this is a pessimistic sign that businesses have toward the future economic outlook and a potential competitiveness concern. The same thing goes for the changes in the import price index.
In the normal case, when exports and imports increase, this will lead to higher production costs and higher final selling prices for end users. And that is a dominant effect of high inflation and results in lower demand consumption and softer growth. But that is not always the case.
In some cases where the demand has already deteriorated due to a slowdown and lack of confidence in the economic outlook ahead, businesses are very reluctant to increase an additional cost. This aims to increase more competitive advantage within the industry. But in return, they are very likely to reduce production costs and employment levels through layoffs. In the end, slow growth is still inevitable for them. And yet, there are other scenarios when higher tariff policies come into effect.
Here are some scenarios:
- If increases and businesses negotiate with the foreign manufacturer to bear the cost→ businesses will sell the goods at the normal price, and the manufacturer will face a high inflation in their economy in return (very unlikely case).
- However, businesses could also find domestic suppliers to reduce the tariff cost and maintain price stability.
Please remember that some limitations or interventions from government policies may be used to mitigate the impact of tariffs on domestic consumers and businesses.
While we are now quite familiar that these economic indicators could be used to predict inflation data (CPI, PPI, or PCE), most policymakers also use them to monitor trade competitiveness, develop trade policies, and assess the impact of exchange rate fluctuations.
Hold on. How do they use it to assess the impact of exchange rate fluctuation? So when a country’s current depreciates, the cost of import would be very likely to increase while benefiting the exported goods. This could have both positive and negative consequences for the economy, depending on which side they are more on. For instance, Australia is known for exporting more than it imports, as they are rich in natural resources such as iron, ore, coal, gold, and natural gas. So having weaker currency would lead them to price advantage, potential sales, and profit-boosting.
