Tailwinds from the East: how has the rising share of imports from emerging markets affected import prices?

This paper quantifies the effect of the rising share of imports from emerging market economies (EMEs) on import price inflation in the UK. Using a panel regression approach that accounts for heterogeneity across industries, we estimate that between 1999 and 2011, the rise in China’s import share of manufactured goods lowered UK import price inflation by around 0.5 percentage points per year—we call this the ‘tailwind’. Rising imports from other EME country groups are not found to have any significant impact. Our approach allows us to decompose this effect: two-thirds arises from the direct impact of switching to lower-cost Chinese goods; the remaining third comes from other exporters lowering their prices in response to stronger competition from China. We find no evidence that higher inflation rates in EMEs has so far reduced or reversed the sign of this tailwind.