External price impulses to imported consumer goods.

Author:Rostoen, Johan Overseth
 
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The low consumer price inflation in Norway may largely be explained by the sharp fall in prices for imported goods, which is a result of a price fall in other countries and an appreciation of the krone. The increase in prices for different product groups that are among the imported consumer goods has varied considerably, reflecting a shift in import patterns and strong productivity growth for the production of some goods. To capture these factors, we have calculated an alternative indicator for external price impulses to consumer goods, composed of foreign prices for seven product groups. A disaggregated approach of this kind will probably provide a better measure of price impulses than traditional indicators that are based on aggregated indices for export prices or producer prices among trading partners.

Introduction

Inflation is low in Norway and has been considerably below the inflation target of 2 1/2 per cent. The low consumer price inflation may largely be explained by the sharp fall in prices for imported goods which is a result of a price fall in other countries and an appreciation of the krone (see Chart 1). Imported consumer goods have a weight of 28 per cent in the consumer price index adjusted for tax changes and excluding energy products (CPI-ATE). Prices for clothing, footwear and audiovisual equipment have shown the sharpest decline (see Chart 2). These goods account for about 1/3 of imported consumer goods. The fall in prices for the other imported goods in the CPI-ATE has been less pronounced. Car prices, for example, are currently at about the level prevailing in 2002.

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Developments in prices for imported goods in Norway's consumer price index are largely determined by exchange rate movements and developments in foreign prices for these goods. Prices for these goods are also influenced by domestic factors such as wage growth and sales margins, shifts in trading patterns and changes in tariff rates. This article discusses how we can measure changes in foreign prices for imported consumer goods. Changes in these prices are referred to as external price impulses to consumer price inflation. A discussion of the traditional indicators for external price impulses follows. These indicators have a number of weaknesses. We then present a new indicator for external price impulses to consumer price inflation. This indicator has been described in a box in Inflation Report 1/04.

Traditional indicators

There are no statistics that provide a precise measure of the external price impulses to consumer goods. We have traditionally estimated the externally generated price impulses in the light of developments in commodity prices and aggregate indices for trading partners' consumer prices, export prices and producer prices for manufactured goods. These statistics are readily available and the figures are updated regularly. Over time, there will be a relationship between growth in trading partners' unit labour costs in manufacturing and their export prices. Unit labour costs may thus also be an indicator of the external price impulses to Norwegian consumer prices. These figures are updated less frequently, however, and it is extremely difficult to ensure that the figures from different countries are comparable.

Aggregate indices will not necessarily capture the external rise in prices for imported consumer goods in Norway. First, a good measure of the rise in prices for imported consumer goods only reflects the rise in prices for the consumer goods that we import. The aggregate indices for trading partners' export and producer prices measure the prices for intermediate goods, capital goods and consumer goods. The indices thus contain a range of products that are not among the imported goods in the Norwegian consumer price index.

Second, foreign consumer and producer prices also include prices for goods that are supplied to the domestic market. These prices will thus be influenced by goods that are not traded internationally. Examples are newspapers and books. International trade of such goods is limited due to language barriers. Price developments for these goods among our trading partners therefore provide little information about foreign price impulses to the Norwegian economy.

Third, the traditional indicators for developments in prices for imported goods in foreign currency do not capture the effects of shifts in imports from high-cost to low-cost countries. The share of imports from low-cost countries (2) has increased from 5 per cent in 1990 to 13 per cent in 2003. Imports from China accounted for about 1/2 per cent of our imports in 1988. In 2002, this share had increased to 5 1/2 per cent. This has dampened the external price impulses to the Norwegian economy.

External price impulses may also be measured on the basis of Norwegian statistics. External trade statistics include figures for changes in Norwegian import prices. Import prices refer to actual merchandise imports and reflect any shift in imports from high-cost to low-cost countries. Norway imports consumer goods, capital goods and intermediate goods. Thus, the aggregate import price index will not necessarily reflect the direct impulses to imported consumer goods. In foreign trade, prices are calculated on the basis of imports measured by volume and value. Quality improvements are therefore not taken into account when calculating import prices. This makes it especially difficult to calculate import prices for audiovisual equipment, for example, which has gone down in weight at the same time as technological advances have been...

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