Academic journal article Monthly Labor Review

Crude Oil Prices Spur Gains for U.S. Import and Export Price Indexes, despite the Appreciating Dollar: 2016 Annual Summary

Academic journal article Monthly Labor Review

Crude Oil Prices Spur Gains for U.S. Import and Export Price Indexes, despite the Appreciating Dollar: 2016 Annual Summary

Article excerpt

Since 2012, the U.S. import and export price indexes have experienced a downward trend. However, in 2016, these indexes reversed trend as both recorded over-the-year increases. Crude oil prices and exchange rates tell much of the story. This article discusses how changes to these two fundamental economic characteristics contributed to 2016 trends and examines the price movements found in detailed indexes for U.S. imports and exports.

Major U.S. trade statistics in 2016

In 2016, prices for U.S. imports and exports rose 1.9 percent and 1.3 percent, respectively. (1) This marked the first calendar-year price increase for both imports and exports since 2011. The U.S. dollar appreciated over 2016, continuing the upward trend that began in 2014 and persisted through 2015. However, a strong U.S. dollar and the resulting downward pressure on prices was not enough to offset increasing fuel prices, which drove both import and export prices upward.

In 2016, the total trade value of goods fell, despite rising import and export prices. The trade value of U.S. export goods fell 3.5 percent from 2015 to 2016, from $1.5 trillion to $1.45 trillion. (2) Likewise, the value of total trade of U.S. import goods declined 2.7 percent, from $2.25 trillion to $2.19 trillion. (3) As a result of the changes in total trade value for export and import goods, the U.S. trade balance was reduced by 1.1 percent, from $745 billion to $737 billion. (4) (Figure 1 charts these economic characteristics, along with import and export prices.) According to the U.S. Census Bureau, these declines were attributable to a drop in total trade value for two product categories: (1) industrial supplies and materials and (2) capital goods. Values for these items were largely affected by a global slowdown in crude oil production, petroleum products production, and demand for associated oil drilling equipment and machinery. (5)

In 2016, the U.S. dollar appreciated against most major currencies because of improved overall economic conditions in the United States. This was at least partially attributable to the 0.25-percentage point interest rate hike implemented by the U.S. Federal Reserve in December 2015 -- the first rate increase in 7 years. (6)

The relative strength of the dollar affects U.S. import and export prices. Typically, a stronger dollar lowers prices for both because importers use fewer dollars to buy the same foreign goods and exporters lower prices to maintain competitiveness. (7) Many commodity prices are inversely correlated to the strength of the U.S. dollar. For example, when the dollar appreciates, gold and other precious metal prices generally fall. This relationship exists because these precious metals are generally considered safe-haven investments, attractive during economic downturns but less appealing during periods of economic stability, when the dollar is generally strong. (8) Crude oil prices are similarly affected, tending to fall when the dollar is strong. Because crude oil is priced in U.S. dollars, the dollar's appreciation stimulates supply and dampens demand, contributing to a fall in price.

Over the past 3 years, the U.S. dollar appreciated roughly 26 percent against a broad-based average of foreign currencies, placing downward pressure on the U.S. import and export price indexes. However, unlike in 2014 and 2015, prices for imports and exports both increased in 2016. The crude oil and petroleum market responded to global market fundamentals rather than exchange rate pressures. The increase in the top-level import and export price indexes was largely a result of rebounding fuel prices. (9)

Rebounding fuel prices: the primary catalyst in 2016

The U.S. Bureau of Labor Statistics (BLS) all-commodities import and export price indexes are calculated using the U.S. Bureau of Economic Analysis (BEA) detailed end-use classification system. (10) The BEA end-use category of fuels and lubricants includes crude oil, refined petroleum and petroleum products, coal, and natural gas. …

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