Inflation and the dollar’s value

Date posted: May 22, 2013

Many people worry about all the new money the Federal Reserve has been creating in recent years and the impact on the dollar’s value. Can you explain what these various impacts might be? N.C. State University economist Mike Walden responds.

“There are two issues here, the domestic issue and the international issue.

Obviously, when we have a reduction in the dollar value domestically, that means more domestic inflation. That means that we’re paying more for all the goods and services that we buy. And right now, that does not seem to be an overwhelming issue.

The overall inflation rate capturing everything that people buy on average is 2 percent. It could go higher if the economy heats up. But I think historically when we look at 2 percent that seems to be a relatively modest level.

Now one of the problems is that many people’s wages and salaries are not going up at the rate of 2 percent. So even 2 percent inflation is putting them behind.

The other issue is how the lower value dollar affects our international situation. That is how we trade dollars for euros or dollars for yen or so forth.  And here, it’s not our inflation rate alone that affects that trade, but our inflation rate compared to foreign inflation rates.

And right now we’re looking very good. In fact, the dollar has actually gone up in value against the euro.  It’s gone up in value against the yen. It’s because those countries have a potential inflation problem. So, these are the two things you need to look at and separate when you’re talking about the dollar’s value, the domestic impact and the international impact.”

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