Friday, September 26, 2014

The Dollar and Inflation

The U.S. dollar has been on a tear lately. Yesterday it reached a four-year high against a basket of global currencies. For the third quarter as a whole, the value of the dollar has risen by more than 6 percent, its best quarterly performance in more than four years.

One benefit of a strong dollar is that it makes imported goods less expensive. Sure enough, in August, the Consumer Price Index dropped by 0.2 percent, after rising at an annual rate of around 1.6 percent each month from April through July. Is the strong dollar the reason?

New research from the Cleveland Fed reports that the relation between the two is not as strong as it might seem. Since 1990, a stronger dollar has indeed made imports less expensive but has had minimal import overall on prices of core goods. So it seems that there are stronger forces on inflation than the strength of the dollar.

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