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The Inflation Beat
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Inflation Forecasting Methodologies
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Currency
The strength or weakness of a nations currency makes the costs of both imports and commodities either less expensive or more expensive.  This ultimitely affects the input costs that go into producing a good or providing a service.

What makes currency interesting for inflation forecasting is that it tends to trend either lower or higher for long periods of time.  In other words, it's not overly volitile year to year.

Here is a long term chart of the US Dollar index going back to 1973:


A nations currency also impacts the cost of imports from other countries.  Having a strong currency with strong purchasing power gives the consumer more bang for their buck when buying imports.   Nations sometimes put on tarriffs or taxes to the importing country to help offset the differance in price to help domestic suppliers to compete on a more even playing field.

Depending upon the direction of the currency, getting stronger or weaker, will determine whether it's a deflationary force that helps lower input costs, or an inflationary force that makes input costs higher.

As you can see in the chart above, the dollar peaked in 1985 and has been in a downtrend since.  At the current time, the dollar is very strong.  It's been rising since 2011, the same year Gold peaked for example, and has thus, been a deflationary force against credit creation since then.  This also helps businesses keep costs down and potentially improves their profits.

It's difficult to see the current direction of the dollar at the current time. What I look at however, is simply what the difference in the dollar Vs. a year ago is going to be to help see if it'll be an inflationary force or deflationary force. 

There are pluses and minuses to having a strong dollar.  The positive is the lower input costs and the ability for Americans to travel to foreign countries and get a larger bang for our buck.  The downside is foreigners are less able to afford to buy or would even want to by US made goods and services, thus giving us a trade deficit.  

We need to watch the dollar!


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