A recent spike in the U.S. dollar is unlikely to put sufficient downward pressure on import prices to have a significant negative effect on inflation, according to researchers at the Federal Reserve Bank of Cleveland.
The U.S. dollar has been on a tear, hitting a four-year high against a basket of major currencies Thursday amid mounting expectations the Federal Reserve will raise interest rates next year while its counterparts in Europe and Japan consider further measures to raise inflation and spur growth.
Chicago Fed President Charles Evans highlighted the potential danger from a firmer U.S. currency Wednesday. “If the dollar ended up being very strong that would lead us to have fewer inflationary pressures in terms of our index––the implication of that would be to provide a little more accommodation in the U.S.,” he told reporters after a speech.
The Cleveland Fed said low inflation overseas, particularly in Europe and Japan, has been a drag on U.S. inflation, which has undershot the Fed’s 2% target for over two years. That trend could continue, say William Bednar and Edward S. Knotek II, the Cleveland Fed researchers.
“To the extent that this global inflation trend continues to be a useful predictor of future domestic inflation, its ongoing low readings compared with the survey of professional forecasters’ long-run forecasts of 2% point to the potential for additional subdued U.S. inflation ahead,” the say.
However, the study found the U.S. dollar’s strength in itself will probably not place additional downward pressure on prices.
“While there is some evidence to support this pass-through channel, it is generally not very strong,” the study said.
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