Imported inflation

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Imported inflation is price-level increase caused by rising costs of foreign goods and services entering a domestic economy (Blanchard O. 2021, p.203)[1]. When the dollar weakens, imported BMWs cost more. When oil prices spike globally, gasoline costs more everywhere. When Chinese factories raise prices, American retailers pass increases along. None of these price jumps originate domestically—they're imported.

Small, open economies feel this acutely. Singapore imports most of its food and energy. Belgium trades heavily relative to GDP. Even mild exchange rate moves or foreign price changes hit their price levels hard. Larger, more self-sufficient economies have more insulation—but nobody escapes entirely.

Two transmission channels

Imported inflation arrives through two routes:

Direct imports. When foreign-made consumer goods cost more, consumer prices rise immediately. Japanese cars, French wine, Korean electronics—price increases feed directly into inflation measures.

Imported inputs. Domestic producers use foreign components and materials. German machine tools, Chinese microchips, Brazilian coffee beans. When input costs rise, domestic producers face choices: absorb the cost (reducing margins) or pass it through (raising prices). Usually, both happen[2].

The input channel often matters more than direct imports. Consider a domestically manufactured car. Steel from Korea. Aluminum from Australia. Microprocessors from Taiwan. Rubber from Indonesia. Even "domestic" products contain substantial import content. Rising input costs ripple through supply chains.

Causes of imported inflation

Several forces can trigger imported price increases:

Exchange rate depreciation

When domestic currency weakens against foreign currencies, imports become more expensive in domestic terms.

Example: If €1 = $1.00 and the dollar depreciates to €1 = $1.20, a German car priced at €50,000 rises from $50,000 to $60,000—a 20% increase for American buyers with no change in the euro price.

Depreciation causes imported inflation mechanically. The formula:

\[Domestic\\ Price = Foreign\\ Price \times Exchange\\ Rate\]

When the exchange rate rises (more domestic currency per unit of foreign currency), domestic price rises proportionally—holding foreign prices constant[3].

Why currencies depreciate:

  • Loose monetary policy (low interest rates attract fewer foreign investors)
  • Trade deficits (more demand for foreign currency to pay for imports)
  • Political instability (capital flight)
  • Inflation differentials (currencies of high-inflation countries tend to weaken)

Foreign price increases

Even with stable exchange rates, prices rise abroad. Inflation in trading partners flows to importing countries. Chinese manufacturing costs have risen substantially since 2000—those increases eventually reached American consumers.

Global commodity shocks

Commodity prices affect everyone. Oil, grain, metals—these trade globally at world prices. When oil spiked from $20 to $140 per barrel between 2001 and 2008, every oil-importing nation experienced cost increases. OPEC's 1973 embargo quadrupled oil prices overnight, triggering inflation crises across the developed world[4].

Commodity-intensive economies face greater exposure. A country importing 100% of its energy suffers more from oil shocks than one with domestic production.

Pass-through effects

Not all import price increases translate fully into consumer prices. The degree of "pass-through" depends on several factors:

Market structure. Competitive markets pass through costs more completely. Firms with market power can absorb some costs in margins—or use cost increases as cover for larger price hikes.

Import share. Products with higher import content show greater pass-through. A T-shirt made entirely in Bangladesh passes through foreign cost increases fully. A service with minimal import content barely notices.

Currency invoicing. Goods invoiced in domestic currency show less immediate pass-through. If an American importer pays in dollars, the foreign exporter absorbs exchange rate changes initially. Goods invoiced in foreign currency pass exchange rate moves through immediately[5].

Demand conditions. Weak demand limits pass-through. If customers won't pay higher prices, firms absorb costs. Strong demand enables full pass-through or more.

Credibility of monetary policy. When central banks maintain credible inflation targets, firms expect any inflation to be temporary. They're less likely to raise prices aggressively, limiting second-round effects.

Second-round effects

First-round effects are direct: imports cost more, so prices rise. Second-round effects are indirect—and potentially more dangerous.

Workers facing higher living costs demand wage increases. Firms facing higher wage costs raise prices further. A wage-price spiral develops. What started as imported inflation becomes domestically generated inflation.

Central banks watch for second-round effects carefully. One-time import price increases aren't the problem—ongoing spirals are. The 1970s showed how imported oil shocks, combined with accommodative monetary policy and strong wage indexation, produced years of high inflation[6].

Historical examples

1973 oil crisis. OPEC's embargo quadrupled oil prices. Japan, importing nearly all oil, saw inflation reach 25% in 1974. Britain experienced 24% inflation. The United States, partially self-sufficient, still saw inflation hit 11%.

United Kingdom after Brexit (2016). The pound dropped 15% against the dollar and euro following the referendum. Import prices jumped. UK inflation rose from below 1% to above 3% by 2017—well above the Bank of England's 2% target.

Argentina (2018-2019). The peso collapsed, losing half its value against the dollar. Import prices surged. Inflation exceeded 50% annually, devastating living standards.

Turkey (2021-2022). Unorthodox monetary policy and political pressures drove the lira down 80%. With Turkey importing most of its energy and many consumer goods, inflation reached 85% by late 2022[7].

Policy responses

Countries facing imported inflation have limited tools:

Monetary policy tightening. Raising interest rates strengthens the currency (attracting capital inflows) and dampens domestic demand. But it also slows economic growth—an unpleasant tradeoff when the economy is already suffering from imported cost increases.

Exchange rate intervention. Central banks can sell foreign reserves to buy domestic currency, supporting its value. This works temporarily but depletes reserves. Sustained intervention against market forces typically fails.

Subsidies and price controls. Governments sometimes subsidize fuel or food to shield consumers from world price increases. These measures are expensive and distort markets, but may be politically necessary during acute crises.

Structural adjustment. Reducing import dependence takes time but provides long-term protection. Domestic energy production, diversified trade relationships, and local sourcing reduce vulnerability[8].

Accepting the adjustment. Sometimes the best response is accepting temporary higher inflation while ensuring it doesn't become embedded in expectations. Fighting imported inflation too aggressively may cause unnecessary recession.

Measurement challenges

Distinguishing imported from domestic inflation isn't straightforward:

  • Supply chains interweave domestic and foreign content
  • Exchange rate effects lag price changes
  • Substitution between domestic and imported goods complicates measurement
  • Quality adjustments affect import price indices

Statistical agencies construct import price indices, but these capture only direct imports—not the import content embedded in domestic production.

Economists sometimes estimate imported inflation using input-output tables that trace import content through production chains. These estimates suggest import exposure exceeds what direct import shares imply[9].

Small open economies

The challenges intensify for small, trade-dependent economies:

Singapore. Imports exceed 100% of GDP (re-exports inflate the figure). The Monetary Authority of Singapore manages inflation primarily through exchange rate policy rather than interest rates—imported inflation dominates the picture.

Belgium and Netherlands. Trade-to-GDP ratios exceed 150%. European Central Bank policy must balance diverse exposures—Germany is less trade-sensitive than smaller members.

Hong Kong. Currency pegged to the dollar, no independent monetary policy. Imported inflation from dollar weakness or mainland Chinese price increases passes through directly.

These economies have little choice but to absorb imported inflation or use unconventional tools.

Inflation expectations

Central bank credibility matters enormously. When people expect stable prices, one-time import shocks stay one-time. Workers don't demand compensating wage increases. Firms don't raise prices preemptively.

When credibility is weak, imported inflation triggers broader price-setting changes. Everyone rushes to protect themselves, creating the spiral policymakers fear. Maintaining credibility—through consistent policy and clear communication—is the best long-run defense[10].


Imported inflation — recommended articles
Economic trend — Monetary policy — Currency depreciation — Macroeconomics

References

Footnotes

  1. ↑ Blanchard O. (2021), Macroeconomics, p.203
  2. ↑ Campa J.M., Goldberg L.S. (2005), Exchange Rate Pass-Through, pp.679-690
  3. ↑ Mishkin F.S. (2008), Exchange Rate Pass-Through and Monetary Policy
  4. ↑ Blanchard O. (2021), Macroeconomics, pp.215-228
  5. ↑ Campa J.M., Goldberg L.S. (2005), Exchange Rate Pass-Through, pp.682-685
  6. ↑ Blanchard O. (2021), Macroeconomics, pp.234-248
  7. ↑ Reserve Bank of Australia (2023), Causes of Inflation
  8. ↑ Mishkin F.S. (2008), Exchange Rate Pass-Through and Monetary Policy
  9. ↑ Campa J.M., Goldberg L.S. (2005), Exchange Rate Pass-Through, pp.687-690
  10. ↑ Blanchard O. (2021), Macroeconomics, pp.267-278

Author: Sławomir Wawak

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