March 25, 2021

We sometimes hear of the concept of “importing” or “exporting” inflation. The force behind this event is the rise or loss of value of the United States dollar against other currencies. The last ten years have been a time of rising dollar value compared to other world currencies. Lower interest rates around the world compared to US treasuries have made the dollar more valuable in comparison.

If someone in Spain wants to buy a US treasury, they must first buy dollars to make the purchase. This causes the dollar to appreciate against their home currency. If Spain makes sandals, it allows an American wholesaler to buy their sandals at an ever-lower price as the dollar goes up in value. Americans experience deflation at the expense of Spain.

The Euro once was exchanged at $1.45 in January 2010.1 It got as low as almost $1.06 in March of 2020.2 That works out to over a 25% appreciation in a decade. The last ten years have been good at Walmart providing ever lower prices. We thus experience deflation of things purchased from overseas.

The future of the US dollar is now looking at a declining value against other currencies. Thus, to buy something made overseas will systematically cost more and more. This is called importing inflation. The trip to Europe will cost more in coming years rather than less.

Increasing inflation adds additional pain to lower income earners. Wages always lag behind consumer price increases. Inflation is not your friend unless you own real assets.

Euro to US Dollar Spot Exchange Rates for 2010
Euro to US Dollar Spot Exchange Rates for 2020

This is a hypothetical example and is not representative of any specific investment. Your results may vary.