DEFINITION of Import And Export Price Indexes (MXP)
BREAKING DOWN Import And Export Price Indexes (MXP)
Import and export indexes are produced by the International Price Program (IPP), created by the the Bureau of Labor Statistics (BLS) within the United States Department of Labor (DOL). The BLS defines its import and export prices indexes as "containing data on changes in the prices of nonmilitary goods and services traded between the U.S. and the rest of the world." These measures "show how prices of a market basket of goods and services in international trade change from one period to the next."
A little more specifically, the import and export prices indexes are created by compiling the prices of goods purchased in the U.S. but produced out of country (imports) and the prices of goods purchased out of country but produced in the U.S. (exports).
Uses for the Import and Export Prices Indexes
According to the BLS, the import and export price indexes are used to deflate government trade statistics, or to look at them over time. They are used to predict possible future inflation in both domestic production, and prices charged. They are used to set fiscal and monetary policy, to measure the exchange rates, forecast future prices, and negotiate trade contracts. And finally, to identify specific industrial and global price trends.
The data from these indexes often has a direct impact on the bond markets. The indexes are used to help measure inflation in products that are traded globally. Bond prices will often decrease when importing inflation becomes to high, because it erodes the value of the original investment (principal).
Inflation can also hurt the equity markets, because as inflation increases, interest rates are often raised to help curtail the rising prices. Rising interest rates often mean falling stock prices.
Weakness of Price Indexes
According to Walter J. Wendells, economics professor at North Carolina State, there are two major weaknesses to price indexes.
The first is that prices indexes do not always fully account for changes in quality. So, prices may rise or fall, but the price indexes sometimes fail to indicate whether these fluctuations are reflective of a higher or lower quality product, that might render the fluctuations irrelevant, or at the very least, less relevant in measuring whether or not the cost of living has actually increased or decreased.
The second is that some indexes ignore, or fail to account for changes in consumption patterns. If the price of something goes up, due to the law of demand, consumers buy less of those goods. In this way, "consumers partially offset some of the impact of higher prices on their cost of living."