From The Free Forex Encyclopedia
The import prices index follows the increase or decrease in the prices paid for goods imported to a host country. The figure is important in relation to the trade balance. Trade balance indicates the difference between exports and imports. Trade balance is one of the major compositions of a country’s current account which tracks the flow of capital in and out of a country.
Consider Country X ($X) and Country Y ($Y) as a trading partner. If Country X’s exports exceed its imports, it is said to have a trade surplus (positive trade balance). In this scenario, demand for the $X is higher as Country Y would need to exchange its $Y for $X to purchase goods from Country X. For this reason, a trade surplus is positive for $X. On the other hand, a trade deficit (negative trade balance) is negative for $X.
Assessing the changes in import prices allow market participants to gauge a country’s trade balance. By knowing the changes in import prices, one may determine if, for example, an increase in trade balance is a result of an increase in import volume or just simply an increase in import prices. In this regard, a spike in import prices can affect the host country’s inflation (relative increase in prices of a basket of goods and services).
The release of import prices, however, does not have much weight in swaying the market.
Note: The report includes figures that exclude the price of oil as oil prices tend to be very volatile.