Market News

Does a Stronger Dollar Really Spread Inflation Globally? - CATO INSTITUTE

JUNE 19, 2021

By Alan Reynolds

A front‐page Wall Street Journal headline, “U.S. Stirs Global Inflation Fears,” claims “A booming U.S. economy… is driving inflation higher around the world and pushing up the U.S. dollar.” It is not clear whether the authors believe a stronger dollar is inflationary (which would certainly be novel) or that U.S. inflation would entice foreigners to trade their currencies for our (which seems equally puzzling). The victims chosen to illustrate either theory – Turkey, Russia, and Brazil – are particularly peculiar.

In reality, a rising dollar should have a dampening effect on prices of internationally traded commodities priced in dollars, which is the opposite of spreading inflation globally.

The normally sensible convention of using year‐to‐year changes, however, is now a poor measure of inflation generally, especially commodity inflation, because the world economy was largely locked down one year ago. In April 2020 West Texas Intermediate crude oil was down 74.1% over 12 months, which is just one pandemic‐related reason year‐to‐year CPI inflation fell to zero that April and May. 

One year later, crude oil was up 128.1% from a year earlier. But that is obviously calculated from an extremely depressed base (Texas crude hit $13.64 on April 22, 2020). 

The same is true of most commodities such as metals, lumber and grains. Blaming the U.S. for rising commodity prices in Turkish lira and Russian rubles is strange, since Turkey’s currency was down 21.6% against the dollar by June 2, according to The Economist, and Russia’s was down 6.1%. Year‐to‐year CPI inflation (though exaggerated by the base effect) was 17.1% in Turkey and 5.5% in Russia.

That was not due to a “booming U.S. economy.”

The answer, as usual, is Blame America. Only the questions change


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