2015 Series • No. 2015–9
Current Policy Perspectives
The Effects of a Stronger Dollar on U.S. Prices 
Since 2014:Q3, the U.S. dollar has experienced the third-fastest appreciation in over 30 years, with its nominal exchange and real exchange rate rising 15 percent against almost all foreign currencies (as measured by the Major Currencies Dollar Index). This sudden and rapid gain has engendered concerns about how a stronger dollar will affect U.S. export and import prices and ultimately, consumer prices and inflation in the United States. This paper assembles a rich database, spanning the period from 1985:Q1 through 2014:Q4, that combines several measures of prices and exchange rates in order to examine the likely outlook for U.S. import and export prices and consumer prices in the short run (one quarter) and over a 24-month period.
Key Findings
- A broad measure of U.S. import prices (all commodities except petroleum) show an exchange rate pass-through in the short run of 26-32 percent and a pass-through of 42-45 percent after 24 months. A narrower measure of import prices for consumer goods, excluding automotive imports, shows a short-run pass-through of 13-15 percent and a 24-25 percent pass-through after 24 months.
- The 15 percent appreciation of the U.S. dollar is expected to reduce consumer prices by -24 percent in the short run and slightly over -0.40 percent after 24 months. A similar analysis of inflation shows a large drop of a quarter of a percentage point in the short run, followed by smaller negative values in the next seven quarters.
- The rise in the U.S. dollar will mainly affect the foreign currency value of U.S. export prices-the short-run pass-through into export prices for a 10 percent appreciation in the U.S. dollar will range between 0.86 and 0.99 percent.
Implications
The recent rise in the U.S. dollar has taken place without a financial crisis at play, in contrast to the dollar's rise during the Asian and Russian financial crises in 1998 and the2009 rise during the global financial crisis. The effect on U.S. consumer prices and U.S. current and expected inflation should be relatively modest. The dollar's appreciation will mainly affect of U.S. exports.
Abstract
We review the effects of a dollar appreciation on U.S. inflation, and on U.S. import and export prices. We calibrate the effects to match the 15 percent dollar appreciation that has occurred since June 2014. Pass-through into import prices and consumer prices is modest. Specifically, a 15 percent dollar appreciation should reduce consumer prices by a quarter of a percentage point in the short run, and by four-tenths of a percentage point after two years. In contrast, pass-through into U.S. exports prices is significantly larger, implying that most of the trade balance adjustment following a change in the value of the dollar occurs through the export channel.