Table of Contents
What is Inflation and CPI?
Inflation is an increase in the price of goods and services that households buy. It is measured as the price change of that price. In general, prices rise over time, but prices can also fall (a phenomenon known as deflation).
The Consumer Price Index (CPI) is a commonly used measure of inflation by tracking changes over time in the prices consumers pay for a basket of goods and services. These products and services fall into eight broad categories: Food and Drink, Housing, Clothing, Transportation, Health, Entertainment, Education, and Communication Words.
The consumer price index is calculated by measuring the price of a fixed basket of goods and services during a period relative to the price of the previous period. Therefore, changes in the CPI predict changes in the cost of living in the United States. Therefore, the CPI is the most commonly used financial measure to identify the period of inflation (or deflation) in the United States.
Will a drop in USD cause a Global Drop?
The effect of inflation on the time value of money is that the dollar depreciates over time. The time value of money is a concept that describes how money available today is worth more than money in the future. It also causes change currency exchanges or forex. It also assumes that you are not currently investing your money in stocks, debt securities or bank interest. Generally, if you have a dollar in your pocket today, if you put it in your pocket, the value or value of that money will decrease a year from today.
Economists expect further weakness in the US dollar over the next few months as the Fed appears to be shutting its door on rate hikes until the spring and leaving the US dollar with its wrecked friends to rise in silver.
Countries with the Highest Inflation:
Venezuela has one of the highest inflation rates in the world, with inflation reaching 1 million percent last year. Sometimes prices in Venezuela change so quickly that stores don’t put price tags on their products and tell customers to ask employees for the price of each item that day. Other countries with high inflation rates are:
- Venezuela 1198.0%
- Sudan 340.0%
- Lebanon 201.0%
- Syria 139.0%
- Suriname 63.3%
- Zimbabwe 60.7%
- Argentina 51.2%
- Turkey 36.1%
- Iran 35.2%
- Ethiopia 33.0%
How Inflation affects Biggest Currencies?
Higher inflation will have a more negative than positive impact on currency values and exchange rates. A very low inflation rate cannot guarantee good results for a country, but a very high inflation rate will have a negative impact on the exchange rates of other countries in that country. Inflation is closely linked to interest rates, which can affect the exchange rate. Countries attempt to balance interest rates and inflation, but the interaction between the two is complex and often difficult to manage.
Effect on Currencies and Change in Forex:
In general, a weak currency encourages exports by making goods more expensive, while making them cheaper for foreign consumers to buy. A weak or strong currency can lead to a country’s trade deficit or trade surplus over time.
Conversely, a strong currency can reduce export competition and make goods cheaper, which can widen the trade deficit and ultimately weaken the currency down the road to self-control. But before that happens, industries dependent on exports will be penalized by an overly strong currency.