How Does Inflation Affect Foreign Exchange Rates?


3 Answers

Liam Sheasby Profile
Liam Sheasby answered
Inflation affects the value of goods and services because purchasing power parity is a fundamental determinant of exchange rates. Inflation in one country translates into a rise in the price of goods and services in one country, whereas the value of products in other countries remains unchanged where inflation is subdued. The result of this discrepancy is that the currency of the country experiencing inflation plummets against those other currencies which aren't; it is a devaluation of their currency.

  • What is Inflation?
Inflation is when prices of goods and services rise in an economy over a given period of time. The higher the rate of inflation, the less valuable that money is, i.e. You can buy less with your money (known as purchasing power). If interest rates aren't adjusted accordingly then people will be less likely to save as their money will devalue imminently.

  •   What is Inflation currently?
Inflation is well above the Federal Reserve's target rate. Demand in emerging economies is forcing energy prices up (gas, coal and oil). This feeds through the supply chain which forces the price of commodities across the board up. Food prices are also surging as grain becomes more expensive due to droughts and export restrictions in grain-exporting countries such as Russia.

  • Consequences
Alot of businesses are struggling to stay afloat as a result of stagflation, a stagnant economy coupled with high inflation. As a result many shops simply close because they have gone bust. Towns and cities in the US, the UK, and across Europe are feeling the strain as  prices and taxes rise, this then in turn leads to unemployment and generates poverty and social unrest if left unresolved.
Anonymous Profile
Anonymous answered
Inflation of any country will affect that country's exchange rate. Simply because the influx of extra currency changes its value. If the British Pound and the U.S. Dollar were 1 for 1 (i.e. 1 Pound for 1 Dollar) and the United States had a 50% inflation then the exchange rate would be 1.5 Dollars for 1 Pound because the inflation causes the dollar to lose value. Whichever country goes through inflation, it will take more of that currency to purchase another.
Anonymous Profile
Anonymous answered

Inflation affects a country's economy so it will affect its currency.

Inflation appears when the value of currency goes down. Then it makes exchange rate decrease.


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