Link Between Inflation, Currency Strength is Weak

Over the last few months, as the US dollar has declined in value, many have feared that the end result would be higher inflation in the US. With oil hitting $100 per barrel, commodities trading at all-time highs and yesterday morning's CPI coming in higher than expected, these fears now seem to be coming to reality. However, while there is no denying that prices are rising, and a weaker dollar makes imported goods more expensive, the link between a country's currency and its inflation rate is weak.

In the chart below, we compare the one year change in 28 major currencies versus their country's most recent year/year inflation rate. In the US, while the dollar is down 9.2% over the last year, the CPI has risen by just 4.3%. In Brazil, CPI is rising at a faster rate than the US at 4.6% even though its currency is the best performing of the 28 highlighted (20.05%). And in Russia, inflation is rising at a rate of 12.6% while its currency is up 6.63% over the last year.

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Comments

[SavCD:]

I agree with your premise. The decline of the dollar is linked to a combination of relative global interest rates, and the current account deficit.
On a longer term level, it is linked to the ability to meet obligations, and pay back debt. With a GAAP deficit of $50 trillion, according to the Financial Report of the United States, the dollar has little room to strengthen.
On a third level, Government is purposely driving the dollar down, since the consumer is tapped out and the future of the U.S. is job growth based on exports. A lower dollar speeds up exports.

2008 Feb 25 05:42 PM

[whidbey:]

The dollars value relative to consumer price levels is over the short run, weak and the variation in the relative values of world currency has only a weak short run correlation to prior year inflation rates. The point of your article is not clear. If you mean to suggest that inflation has no effects on currency value, you are wrong because you asked the wrong question.

2008 Mar 01 07:19 PM