Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Press Release

Prices & exchange rate movements; Energy prices & inflation expectations: Cleveland Fed researchers

Impact of dollar’s appreciation on import prices and the CPI is fairly small, say Cleveland Fed researchers

Some worry that the dollar’s appreciation in foreign-exchange markets will push an already soft US inflation rate even lower. While the threat is real, it is overblown, say Federal Reserve Bank of Cleveland researchers Owen F. Humpage and Timothy Stehulak.

According to Humpage and Stehulak, most of the change in import prices reflects declines in petroleum products, which are set in dollars and not directly affected by exchange-rate movements. Still, say the researchers, the dollar’s appreciation is passing through to some import prices and on to the CPI. Their rough calculations suggest that, in general, a jump in dollar exchange rates can affect import prices for at least six months, but the overall impact is fairly small. A 1 percent change in the Board of Governor’s broad dollar exchange-rate index lowers non-petroleum import prices by 0.3 percent cumulatively over six months.

Humpage and Stehulak say that exchange-rate movements have always had less of an effect on US import prices than on other countries’ import prices because roughly 95 percent of the goods coming into the United States are priced in dollars. Still, say the researchers, large exchange-rate movements can induce price effects. From its trough in early July through the end of December 2014, the dollar appreciated 9.0 percent on a broad trade-weighted basis.  Over that same period, total import prices fell by 9.7 percent, but nonpetroleum import prices fell only 1.3 percent. The researchers say their rough estimates of the effects of exchange-rate changes on nonpetroleum import prices suggest that virtually the entire decline reflects the dollar’s appreciation.

Estimating the impact of the dollar’s appreciation on consumer prices—as passed through from import prices—is very difficult, say the researchers, because it depends critically on what is causing the exchange rate to change. In the present situation, they say the dollar’s appreciation seems largely the result of an anticipated tightening of US monetary policy relative to monetary policies abroad, and that tightening itself may eventually affect US consumer prices. The appreciation in part seems a near-term conduit of that change, not so much an independent cause, because exchange rates typically react faster to expected monetary-policy changes than goods prices.

With that caveat in mind, the researchers find a small impact on the CPI. Between July 2014 and January 2015, as nonpetroleum import prices fell 1.3 percent, the CPI fell 1.2 percent. The entire decline in the CPI stemmed from a substantial drop in petroleum products; the CPI less energy rose 0.6 percent. Humpage and Stehulak say their estimates suggest that absent the decline in nonpetroleum import prices, all of which they ascribed to the dollar’s appreciation, the CPI less energy would have risen an additional 0.05 to 0.06 percentage point. The impact on the CPI would have been slightly less.

Read Exchange-Rate Pass-Through and US Prices

Energy prices have modest impact on long-term inflation expectations, say Cleveland Fed researchers

In recent months, two noted measures of long-term inflation expectations have slipped somewhat. Federal Reserve Bank of Cleveland researchers Randall Verbrugge and Amy Higgins examine the role played by energy prices in influencing long-term inflation expectations. Their results suggest that, while dramatic movements in energy prices will shift inflation expectations to some extent, the impact is modest.

Verbrugge and Higgins examine the potential influence of seven different variables on two measures of long-term inflation expectations: the expectations of households from the Thomson Reuters/University of Michigan Surveys of Consumers (UM Survey) and the expectations estimated by the Federal Reserve Bank of Cleveland (FRBC) based upon financial market data and professional forecasts. The researchers find that typically sized energy-price shocks have a statistically significant influence on UM Survey inflation expectations for at least 12 months, but note that the response is quite small. They say a typically sized positive energy-price shock raises UM Survey inflation expectations by just over 0.03 percentage points the month it happens. But 12 months later, the effect of the shock is only 0.01 percentage points. Energy-price shocks also impact FRBC inflation expectations, say the researchers, with the estimated effect rising to a little above 0.03 percentage points two months after the shock and then falling to slightly below 0.02. But after seven months, the effect is indistinguishable from zero.

Noting that the most recent six-month movement in energy-price inflation is far from typically sized, the researchers also do a simple exercise and assume that the entire drop in energy prices happened over the period of one month, amounting to a shock that is about eight times bigger than is typical. They say such a shock would lower UM Survey inflation expectations the next month by about 0.24 percentage points and FRBC inflation expectations by about 0.22 percentage points. Since June 2014, both measures of expectations have dropped by about 0.2 percentage points. Hence, say the researchers, recent drops in energy prices can potentially explain the recent slippage in the two inflation expectations measures. Further, they say this suggests that a rebound of energy prices would lead to a similar rebound in long-term inflation expectations.

While both UM Survey inflation expectations and FRBC inflation expectations appear to be well-anchored, in the sense that they are relatively insensitive to incoming data, these expectations are not identical, say the researchers. Household long-term inflation expectations are much higher. Also, these expectations are differently influenced by shocks; for instance, while macroeconomic shocks impact FRBC inflation expectations, they do not appear to impact UM Survey inflation expectations.

Read Do Energy Prices Drive the Long-Term Inflation Expectations of Households?

If you happened to miss the article we posted on Friday afternoon, you can find it here: Measuring Inflation Forecast Uncertainty.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479