Fight Inflation with the Dollar

It is tempting to assume that a weaker dollar💵 is to blame for inflation.

All of this speaks to the problem with inflation today. Few know what it is. It’s currency devaluation, which means there’s no inflation fight to speak of. Just don’t devalue, but if you’re devaluing, stop. Reverse course. Inflation will cease. 

After all, the causal narrative is very compelling: weaker dollar, imports get dearer, bam, inflation.

It's also attractive because having currency in our arsenal means we can fear inflation less.

Reality is more complex, with more actors. 

First off, much of the economy is domestic. Trade makes up only a portion of the economy and thus spending. Furthermore, exporters and importers may choose to absorb currency movements.

Some who have crunched the numbers say there is an inverse relationship between US dollar strength and US inflation.

source: tradingeconomics.com

But the relationship has little regularity.

Unfortunately, the lag is not constant. As you can see, the time periods between the ups and downs of USDX and CPI on the chart differ quite significantly.

Using 25 years of World Bank data, I've found no correlation between annual changes in US inflation and US real effective exchange rate (REER). 

That is not to say that the fundamental thesis of dollar strength opposing inflation is unsound.

For Australia, a middle-power country with high trade dependence and a non-haven currency (floated in 1983), there is a weak inverse correlation (-0.2) between REER change and inflation change.

So currency strength may affect inflation, just weakly, without predictable timing, and not everywhere, making the relationship pretty useless in real life.

That I am writing this post shows how much I wanted to believe in currency's role in inflation. Not just because it offers a retort to doomsayers who claim difficulty combatting rocketing prices, but also because it would provide an easy way to silence trade warriors who call for devaluing currencies. I want to believe that I can enjoy a strong dollar for cheaper imports alongside steady domestic prices. 

I need to acknowledge that the facts do not fit my ideology, and that if inflation ever becomes a problem again, it will need more than just currency to fight it.