Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19
Silver Is Cheap – And Getting Cheaper - 7th Oct 19
Stock Market Back to Neutral - 7th Oct 19
Free Market Capitalism: Laughably Predictable - 7th Oct 19
Four Fundamental Reasons to Buy Gold and Silver - 7th Oct 19
Gold and Silver Taking a Breather - 7th Oct 19
Check Engine Warning Light ECU Dealer Diagnostic Cost - Land Rover Discovery Sport - 6th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

How Does Inflation Affect Exchange Rates?

Currencies / Forex Trading Oct 10, 2019 - 08:32 PM GMT

By: Submissions


Consumers are always worrying about the rising cost of basic needs, products, and services. Whether we like it or not, the global economy affects all of us.

When we hear the word inflation, we often think about the increase in the prices of the things we buy. But how important is it to understand inflation and the factors that influence it?

The changes brought about by inflation have a strong bearing on every country’s economy, making it as an essential economic variable. It’s also one of the significant factors that influence exchange rates, thus making it one of the most tracked economic indicators.

It’s, therefore, crucial to learn about inflation to better understand why and how it affects the foreign exchange market.

What is Inflation?

Inflation is the increase in prices and the decreased purchasing value of the currency. When the prices of commodities rise, the value of money falls, and inflation increases. Inflation is calculated by tracking the costs of the essential products and services every month. The Collective Price Index (CPI) contains these collective basket values.

Inflation affects all of us – whether you’re a regular consumer, an investor, or a business person. It affects the rich and poor alike since, as mentioned, inflation is a significant factor affecting the prices of consumer goods. It also has a considerable influence on investment assets, like stocks and currency rates.
How Inflation Affects Exchange Rates

When checking out comparison sites like, it’s essential to remember that inflation has a significant impact on exchange rates and vice versa.

Here’s how inflation affects exchange rates and how exchange rates affect the economy in general.

1. Leads to Currency Depreciation/Appreciation

Monetary inflation is one of the main effects of a country’s economic inflation. In general, the higher the rate of inflation, the weaker the currency becomes. If money becomes weaker against other currencies, it loses buying power. If a currency devaluates, the purchasing power of regular consumers is affected, leading to more consumer debt. The same applies to the government with devalued currency – national debt tends to rise.
2. Affects the Price of Imports

When a country’s inflation rate is high, its currency is negatively impacted. When the value of a currency falls, the exchange rate suffers as well. Importers have to pay more because products are more expensive when their currency loses value against the currency of another country.

For example, if the US is importing goods from China, the price of imports will depend on the exchange rate between the USD and CNY.

If you want to know the current exchange rates, check out Travelex exchange rates.

3. Increases Spending

When a currency depreciates due to inflation, commodities become more expensive since imports and raw materials become expensive. An impending price increase due to lower exchange rates and currency value prompts consumers to spend more now.

Once consumers understand the value of their money will decrease, they tend to stock up on things that they need while prices are not yet severely affected. Such is the case when there’s news of oil price hike; it’s not surprising to see cars lining up to gasoline stations to stock up on fuel while gas prices have not changed.

4. Brings More Inflation

When consumers and business people spend more due to inflation, the economic situation worsens. Because people want to spend the depreciating currency, the value of a currency falls at a faster rate. Thus, the economy gets an overabundance of money that nobody wants, which is detrimental to the currency’s exchange rates in the global market.
5. Affects Forex Markets

When a country’s currency becomes weak due to inflation, it’ll buy fewer amounts of other currencies. Aside from the effects of inflation to the local economy, global tourism is negatively impacted when exchange rates drop because of inflation.

Tourists from the country with weaker currency will spend less or even postpone travel to another country due to the loss of spending power.

Inflation presents several disadvantages, but it also has benefits to the economy. Some inflation will do the economy well as long as inflation outpaces the economy’s growth. Inflation should be kept at a moderate level.

Inflation helps the economy by creating more employment, increasing tax revenue, and wages. It also boosts consumer spending and consumption and improving business profitability. Governments should avoid uncontrolled inflation, which negatively affects the standard of living and currency exchange rates.

By Mahira Khan

© 2019 Mahira Khan - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules