With the Dollar Depreciating, Can Inflation Be Far Behind?
Owen F. Humpage and Caroline Herrell Many people believe that a falling dollar in the foreign-exchange market portends future inflation, and they do so for a very good reason: a monetary impulse is very likely to cause the dollar to fly south well before consumer prices take off. Unfortunately for forecasting buffs, other factors besides monetary spurts affect dollar exchange rates, and these things muddy the ability of exchange-rate changes to forecast future inflation patterns. All and all, exchange rates do contain useful information for predicting inflation, but forecasting inflation simply with an exchange rate is a little like eating dinner with only a knife. The dollar has lost a lot of ground in the past few years, heightening concerns among some people about future inflation. Relative to the currencies of the other major developed countries, the dollar has depreciated 40 percent since its peak in February 2002. If we toss the currencies of the key developing countries into the
