The policies of Donald Trump and the statements of the head of the Ministry of Finance Stephen Mnuchin have fallen off the dollar, which caused serious concern among the leaders of the largest economies. During 2017, the dollar fell by about 10% against the currencies of US trading partners.
With President Trump’s trade policies seeking less free trade, as well as amid rhetoric from key officials who would like the dollar to be weakened, can we talk about higher prices for imported consumer goods and, consequently, higher inflation?
The good news is that the effect of exchange rate depreciation on inflation is not really felt in the United States, simply because more trade contracts are held in US dollars than in any other currency.
A 2015 study found that 93% of US imports are in dollars.
According to the study, "a 10% fall in the dollar against the currencies of its trading partners will increase CPI inflation over two years by 0.4-0.7 pp."
The study showed that if the dollar falls, US exports become less expensive, while other countries' currencies depreciate. The result is an increase in premiums, profits and consumer inflation.
We estimate that this amount of inflation will be approximately $ 165 per year for the average worker in California or New York, about 12% of their annual transportation costs or 13% of utility costs.
This is a tangible amount, but still not as significant as the effect of the falling currency on countries where inflation is more sensitive to import prices.
One recent example is the United Kingdom, where something similar has been observed since June 2016.
After voting on the Brexit issue, the pound fell 10%. Since then, there has been a significant increase in inflation in the UK, with one study directly explaining inflation growth of 1.7 pp to 2.6% last year before the referendum. This led to a reduction of £ 448 on an annualized basis for the average British worker.
In other words, voting on the Brexit issue cost the average worker an almost weekly wage due to higher prices.
The dominance of the dollar in trade remains a huge advantage for the American consumer.