Monday, April 09, 2007

Inflation, Imports and Currency Exchange Rates

In his letter ("Importing Inflation," WSJ, April 9, 2007; Page A11) in response to the Wall Street Journal opinion piece, "The New Inflation Equation," by Richard W. Fisher and W. Michael Cox (editorial page, April 6), Tom Willoughby, a reader from Columbus, Ohio, observes:

The writers appear to omit the importance of exchange rate: "A country that consumes only imports will find inflation responds to foreign GDP growth alone." Countries with negative export/import balances eventually see their currency decline, resulting in domestic price increases, or inflation, for imported goods and services. We have not felt much of the impact of this because capital flows have counterbalanced the flow of goods temporarily boosting the dollar. In, time, if the imbalance remains, we will import inflation as our currency declines.

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