Josh Martin and Julian Reynolds

How much have higher import prices increased consumer prices in the UK and euro area? This post explores this question using a framework grounded in some fundamental economic and national accounting concepts. Starting with the GDP price, we adjust for relative import and export prices to arrive at a consumer prices measure – this gives us a sense of the impact of import prices and the terms of trade shock on consumer price inflation. For the euro area, aggregating imports across member countries, which includes trade between members, risks overstating total imports and thus the effect on inflation. Using supplementary data to resolve this issue, we find that the euro area terms of trade shock has been larger than the UK’s.

Why does the terms of trade matter for inflation?

Much commentary has attributed the recent inflationary impulse to the impact of the ‘terms of trade’ shock (eg Lane (2022)). This is defined as the ratio of a country’s export prices to its import prices. If the price of imports increases relative to exports, this makes it harder for an economy to pay for its imports through its exports revenue, and its terms of trade deteriorate. As net fuel importers, the UK and euro area have experienced an adverse terms of trade shock due to the surge in global energy prices, following Russia’s invasion of Ukraine (Dhingra (2023)).

How does this shock affect inflation? The National Accounts framework can help.

Our variable of interest – consumer prices – can be thought of as a weighted average of domestically produced products for domestic consumption, and imported products for domestic consumption. Clearly import prices are relevant for consumer prices, as some of domestic consumption is from imports. If import prices go up by more than the price of domestically-produced products for domestic consumption, then it will push up on consumer price inflation.

The price of all domestically produced products is the GDP deflator, but not all of GDP is for domestic consumption. To get from the GDP price to consumer prices, we need to subtract the effects of things that are in GDP but are not part of the consumer price basket, especially export prices. By subtracting the effect of export prices on the GDP price, just the relevant bit of the GDP price is left.

More formally, we can relate consumer prices (Pc) and the GDP deflator (Pv) using the methodology outlined by Haskel (2023):

  • We start with the usual GDP identity. GDP (V) equals the sum of consumption (C), investment (I), government expenditure (G) and net trade (X-M). For sake of argument, we can ignore I and G (they make relatively little difference here).
  • It follows that: Pv=aPc+bPx-cPm, where Pm is the price of imports, and Px is the price of exports, and where a, b and c are the shares of consumption, exports and imports in GDP respectively.
  • Rearranging and dividing through by a, gives: Pc=Pv+(c/a)(Pm-Pv)-(b/a)(Px-Pv), where (c/a) and (b/a) are the shares of imports and exports in consumption, rather than in GDP.

In words, consumer prices are GDP prices, plus share-weighted import prices relative to the GDP price, minus share-weighted export prices relative to the GDP price. We’ll also account for the small difference between the National Accounts consumption price and the CPI (HICP for the euro area).

What has happened to import prices in the UK and euro area?

Using the approach outlined above, we can quantify the impact of the terms of trade shock on UK and euro area inflation, starting with import prices. The aggregate price of imports is measured by import price indices from the National Accounts, compiled by the ONS for the UK, and by each country’s national statistical institute for euro-area countries, collated by Eurostat.

The annual change in import prices in the UK peaked in 2022 Q3 at 22.2%, while in the euro area it peaked at 20.5% in 2022 Q2. In total, between the end of 2019 and the end of 2022, import prices rose by 26.0% in the UK and 25.0% in the euro area. These are not very different.

How important are imports in the UK and euro area?

What does appear different, from official data directly, is the importance of imports relative to GDP. In the euro area, imports apparently account for about 50% of GDP typically, and are about 90% of the size of total household consumption expenditure. By contrast in the UK, imports are about 30% the size of GDP, and 50% the size of consumption. This suggests the euro area is almost twice as import intensive as the UK. That doesn’t chime with expectations for an open economy like the UK.

Indeed, the data are misleading us here. When Eurostat aggregate the national accounts data for the euro area, they simply add up the values for each country. That means they add up Germany’s GDP, imports and exports, with France’s GDP, imports and exports, and so on. But of course, Germany’s imports could be France’s exports, and Germany’s exports could be France’s imports. Viewed as individual countries this makes sense. But as an aggregate, including within-block trade becomes less useful.

Using additional data from Eurostat, we can net out this intra-euro-area trade. Since every intra-euro-area trade flow is one member country’s import and another’s export, total imports and exports are reduced by the same amount (GDP is unaffected).

What does that do for the euro-area import share? Chart 1 shows the import share of GDP and consumption for the UK and euro area, with and without adjustment for the intra-euro-area trade. After adjustment, these shares look much like the UK – about 30% of GDP and 50% of consumption.

Chart 1: Import share of GDP and consumption, UK and euro area, 2019

Sources: Eurostat, ONS and authors’ calculations.

What has happened to export prices?

Starting from the GDP price, we need to add share-weighted relative import prices, and deduct share-weighted relative export prices, to get to a measure relevant of consumer prices. Higher export prices do not directly affect consumer prices. But if export prices increase by more than the GDP price, then less of the GDP price inflation is relevant for domestic consumer prices.

UK export prices increased 22.0% in total between the end of 2019 and the end of 2022. The euro area also saw an increase in export prices, although by somewhat less than the UK. One explanation for this difference could be that the UK exports some energy products, such as North Sea oil, and has therefore benefited somewhat from higher energy (export) prices. Such export revenue would only directly benefit some firms and workers, and so the typical UK citizen might be experiencing a larger terms of trade shock than the aggregate figures suggest.

Bringing it all together

Table A shows a decomposition of consumer price inflation into the GDP deflator, and the terms of trade effect, for the UK and euro area, following the method in Haskel (2023). Charts 2 and 3 show a time series of these effects. Consumer prices have increased by more than the GDP price in both the UK and euro area, reflecting higher relative import prices. The size of this effect is the price of imports relative to the change in the GDP deflator, weighted by the imports share of consumption (as in Chart 1). This pushed up UK CPI inflation by 6.3 percentage points, and euro-area HICP inflation by 7.7 percentage points.

However, since relative export prices also increased, we need to adjust for that. This offsets 4.0 percentage points of the GDP price inflation in the UK and 3.5 percentage points in the euro area, in terms of the contribution to consumer price inflation. The terms of trade effect is the difference between the import and export price adjustments, and adds to inflation for both economies.

Table A: Contributions to consumer price inflation, cumulative from 2019 Q4 to 2022 Q4

Euro area (adjusted for intra-euro-area trade) UK
Consumer price inflation
(CPI for UK, HICP for euro area)
14.7 16.8
GDP deflator 10.5 13.3
Adjusting for relative export prices -3.5 -4.0
Adjusting for relative import prices 7.7 6.3
Memo: Terms of trade effect 4.1 2.4
Other 0.1 1.1

Notes: Terms of trade = import price adjustment plus export price adjustment. Consumption price inflation (CPI in UK, HICP in euro area) = GDP deflator plus export price adjustment plus import price adjustment plus other. Other accounts for difference between National Accounts consumption deflator and CPI/HICP, and other small factors – see Haskel (2023) for details.

Sources: Eurostat, ONS and authors’ calculations.

It turns out that the intra-euro-area trade adjustment is neutral for the terms of trade effect. Since every intra-euro-area import is also an intra-euro-area export, then conceptually these are entirely netted off and there is no change in the net trade position. In practice, there can be differences due to inconsistencies in reporting imports and exports across euro-area countries, but these are typically small. This is shown by the hashed bars in Chart 2, which are roughly offsetting.

Chart 2: Trade price contribution to annual euro-area HICP inflation, 2019 Q4 to 2022 Q4

Notes: Method as in Haskel (2023), and described in this blog.

Sources: Eurostat and authors’ calculations.

Chart 3: Trade price contribution to annual UK CPI inflation, 2019 Q4 to 2022 Q4

Notes: Method as in Haskel (2023), and described in this blog.

Sources: ONS and authors’ calculations.


The approach set out in our blog helps us understand the impact of higher relative import prices on UK and euro-area inflation. Looking at import prices alone is inadequate because the inclusion of intra-euro-area trade flows in national accounts data distorts upwards the contribution of import prices to inflation in the euro area. Working in the national accounts framework, we also need to account for the effect of export prices. Adjusting for these factors, we still find that the import price shock has been larger in the euro area than the UK, but our estimate of the magnitude of the shock is more in line.

Josh Martin works in the Bank’s External MPC Unit and Julian Reynolds works in the Bank’s Global Analysis Division.

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