How little we know of what there is to know.
Paul Volcker, the former Fed chairman who claimed victory over inflation, gave us a clue: “A nation’s exchange rate is the single most important price in its economy. It influences the entire range of individual prices, imports and exports, and even the level of economic activity.”
The body of evidence supports Volcker. A significant negative correlation exists between changes in the exchange value of the dollar and inflation. A higher dollar dampens commodity prices, including metals and agricultural products, and passes through to lower non-oil import prices, which holds down business costs more generally. Research shows that domestic prices decline 2 percent for every 10 percent rise in the dollar.
The implication is that the 35 percent rise in the dollar since 2011 has persistently been the binding constraint to inflation during this cycle. In other words, inflation in the US has remained low and un...