The Federal Reserve’s easy-money policies are starting to have an impact on the cost of imports for American firms and that’s leading to higher prices, according to Deutsche Bank economist Carl Riccadonna.
In a piece titled Weakening dollar is fueling goods inflation, Riccadonna says what’s happening is that while the world (China, India, Brazil, ECB soon) tightens, the Fed is standing still, and therefore the trade-weighted dollar is in decline. The impact of rising import prices is an increase in the PPI, and that will eventually transfer through to consumers.
Hence, as the upstream inflation pressures resulting from higher import prices percolate through the production pipeline, this significant drag on inflation will dissipate—at the same time that pressures among other components, such as services, rents, food and energy continue to build. As a result, with the “inflation-engine” firing on all cylinders, we project core inflation to rise to 2.1% by year end.
Note the correlation between the trade-weighted dollar and core PPI:
Photo: Deutsche Bank
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