Friday, November 13, 2015

How quickly does a strong dollar benefit consumers?

The answer from the Fed's Stanley Fischer:
One way in which the stronger dollar depresses inflation is by putting downward pressure on import prices. .. 
An important difference between the transmission of dollar appreciation to inflation compared with output is that the effects on inflation are probably more transient. In particular, given that most of the effect on inflation occurs through changes in import prices--and import prices respond quickly to the exchange rate--the peak effect on inflation probably occurs within a few quarters. From the standpoint of the outlook, this transience means that some of the forces holding down inflation in 2015--particularly those due to a stronger dollar and lower energy prices--will begin to fade next year. Consequently, overall PCE inflation is likely on this account alone to rebound next year to around 1-1/2 percent. And as long as inflation expectations remain well anchored, both core and overall inflation are likely to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.

3 comments:

  1. A strong dollar also depresses inflation by making U.S. exports less competitive overseas for services, manufactured, and agricultural goods. These deflationary forces take far longer to wind their way through the economy. With a stronger dollar, U.S. manufacturers look to build facilities in locations where their dollars will purchase more labor and assets. Engineering, and production talent is lost to the U.S. It's extremely difficult to regain the critical mass of expertise, suppliers and subcontractors once that shift occurs.. This hollows out the U.S. economy. Considering these effects as transient is a grave error for long term economic planning, with far reaching geopolitical implications. The United States cedes its global leadership position, as it's economic, and technologic edge fades to other countries less interested in world peace and human rights.

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  2. Having a strong dollar means being able to buy more imported goods for less money; thus pushing away inflation and encouraging deflation. Inflation is having too much money for the amount of demand currently in the economy. Some levels of inflation can be good for borrowers because the same investment in the future could mean spending more money (Patton). However, hyperinflation is an economy in very poor health; nearing collapse. Inflation can erode the purchasing power and make it difficult to predict future costs. Often times, we see a rise in interest rates to compensate for the lost money—ultimately raising the cost of doing business (McMahon).

    On the contrary, deflation is having too much demand for the supply. Deflation causes people and businesses to hoard money to wait for a decrease in the price. In the short term, deflation is a great thing—it causes people to buy more when the prices start to fall; however, may lead to a recession and eventually a depression (Patton). Deflation becomes worrisome when there is an increase in the value of cash, often times faster than the government can re-inflate it. This means a slowdown of economic growth, increase in unemployment rates, and decrease in consumer spending (Steiner).

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    References:
    McMahon,Tim. What is the Current Inflation Rate? Inflation Data. 16 February 2016. 25 February 2016. Web. < http://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp>.
    Patton,Mike. Inflation or Deflation: Which is the Greater Risk? Forbes. 1 July 2013. 25 February 2016. Web. < http://www.forbes.com/sites/mikepatton/2013/07/01/the-truth-behind-the-feds-monetary-expansion/#5fb11a7a5642.>
    Steiner,Sheyna. Deflation: Is it real? What Can you do? Bankrate. ND. 25 February 2016. Web. < http://www.bankrate.com/finance/investing/deflation-is-it-real-what-can-you-do-1.aspx>.

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  3. In my view update about dollar is so crucial since effect the whole market and makes quite a big difference. I am very fortunate that with having broker like OctaFX, it helps me with working nicely since they have highly qualified team of experts with providing daily market news and analysis updates, it gives me better chance in orders to perform well and it’s not even required to pay anything for this since this is absolutely free to use for anyone.

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