Monetary supply has a bigger impact on consumer prices than the effect of imported goods, according to findings from the American Institute for Economic Research (AIER).
“Contrary to popular belief, low-cost imports do not necessarily drive down the prices of U.S. consumer goods," the AIER said. “What does affect prices is the rate of growth in the money supply.”
The institute’s analysis is based on data collected by the U.S. Bureau of Labor Statistics since December 2003. The report found that the Consumer Price Index (CPI) declined even as the cost of Chinese imports increased. Each 1 percent increase in the cost of Chinese imports, AIER economists found, was accompanied by a 0.14 percent drop in the CPI.
Price increases of Canadian goods had an almost negligible impact on the CPI, with each 1 percent increase of Canadian imports accompanied by a 0.007 percent increase in the CPI. Similarly modest increases in CPI were found for each 1 percent increase in Latin American and European import costs.
“Even the price of petroleum imports appeared to have less impact than people assume, with each 1 percent increase in the price of petroleum-related imports resulting in a mere 0.02 percent increase in the CPI,” AIER found.
Meanwhile, the AIER analysis found that a 1 percent increase in the growth rate of the money supply was followed almost immediately by a 0.19 percent increase in the CPI.
“The fact is that increases in the money supply – which more than doubled between 2000 and 2012 – have a greater impact on prices than the cost of imported goods,” said Steven Cunningham, AIER director of research and education. “Ultimately, this means that the U.S. can’t look to cheap import prices to control domestic inflation. With a huge wall of money waiting to flood the economy, the U.S. needs to find its own measures to control inflation.” - Eric Johnson