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.