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Not So Fast On Weak Dollar Concerns

CNBC.com
Monday, 24 Sep 2007 | 10:54 AM ET

There's a lot of concern about whether a weaker dollar could cause higher U.S. inflation, but CNBC’s Steve Liesman says not so fast. Here, he offers a quick overview of different ways to think about the influence of the currency on the inflation process:

  • The dollar is an inflation factor, not the inflation factor
  • Imports make up just 16 percent of the U.S. GDP. Imports have risen as a percent of total U.S. economic activity. A lot of import growth has come from countries that have fixed exchange rates to the dollar, like China and other Southeast Asian countries, so a weaker dollar has no inflation impact from them.
  • Wages are the biggest cost, not commodities or imports

Imports vs. Domestic Prices

A look at the year-over-year change of consumer import prices vs. core inflation finds only a modest relationship. There are two reasons for that:

  • The United States is mostly a service economy and wages are the biggest input to costs in a service economy.
  • The U.S. makes up 25 percent of the world's economy all in one market. As a result, most economists see the U.S. as a price maker, not a price taker.

So, what happens to the U.S. economy will determine what happens to import prices. Import prices will not determine what the price levels are in the U.S.

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