Unanchored: Soaring Prices of Imported Goods Amid Unstable Exchange Rates

When a country’s currency appreciates, the prices of imported goods become relatively cheaper as fewer dollars are needed to pay the same price in other currencies. However, the relationship between exchange rates and import prices is not always straightforward. For example, between February 2002 and July 2008, the dollar fell by almost 35 percent against a broad index of foreign currencies, while the prices of import commodities increased only modestly. This is because other factors, such as changes in supply and demand, can also affect import prices.

Studies have shown that import prices generally rise by about 0.5 percentage points following a 1 percent dollar depreciation. However, the extent of exchange rate pass-through into import prices can vary across countries and over time.The balance of trade can also affect currency exchange rates and, in turn, import prices. When a country’s trade account does not net to zero, there is relatively more supply or demand for a country’s currency, which can influence its price on the world market