The Relationship Between Import Prices and Inflation in the United States

Inflation has been a non-issue in the United States in recent years despite strong economic growth, on balance, and falling unemployment. Some analysts believe that new economy dynamics are responsible for this favorable outcome and further claim that the traditional Phillips curve tradeoff between growth and inflation is no longer a valid assumption underlying economic policy decisions. Others believe that the Phillips curve is indeed alive and well but that favorable supply shocks have masked the still relevant tradeoff between growth and price stability. One potential supply shock candidate is a declining trend in the cost of imports into the United States. This study differs from earlier studies of the relationship between import prices and overall inflation in that it analyzes the impact of both non-petroleum import prices and petroleum-related import prices, and, in addition, extends the analysis into a time period when petroleum prices rose to historic, nominal highs. Overall, the study supports the view that import prices have played a significant role in explaining inflation patterns in recent years