Dissecting the impact of imports from low-wage countries on inflation

Abstract

Using micro data on import values and quantities by product and countries of origin, we quantify the effect of imports from low-wage countries (LWCs) on inflation in France from 1994 to 2014. Imports of varieties produced in LWCs affect the cost-of-living price index through pure-price and taste-shock variations (which, conditional on prices, drive expenditure shares). The pure-price effect includes both the contribution of imported inflation (given the share of imports in consumption) and the effect of imports of intermediate goods from LWCs on domestic prices. Taste shocks cannot be directly observed but are recovered from expenditure shares and relative prices, using estimated values for the elasticity of substitution. We derive an expression of inflation that allows us to disentangle the impact of imports of consumption goods from LWCs on cost-of-living versus CPI inflation — the latter abstracting for composition effects. Overall, we estimate that imports from LWCs lowered CPI inflation by 0.02 pp per year on average, and had a much larger effect on cost-of-living inflation (between 0.13 to 0.20 pp per year depending on how we measure unit values).