Exchange rate pass-through
When your currency weakens, imports get more expensive — but how much, and how fast, depends on where you are.
In plain words
When a country's currency depreciates, imported goods become more expensive in domestic currency terms. A UK importer paying in dollars sees their costs rise automatically when the pound weakens — and those costs tend to get passed on. The degree to which this happens is called exchange rate pass-through: a 10% depreciation with 50% pass-through would raise import prices by 5%. Whether that 5% import price rise translates into 5%, 2%, or 0.5% of consumer price inflation depends on how much of the CPI basket is imported, how competitive domestic markets are, and how sticky consumer expectations are. The BIS Quarterly Review has devoted multiple papers to this mechanism.
Complete vs incomplete pass-through
Economists distinguish between complete pass-through (exchange rate changes fully reflected in prices) and incomplete pass-through (firms absorb some of the cost through margin compression). In practice, pass-through is almost always incomplete in the short run — firms, especially exporters to competitive markets, absorb exchange rate moves to maintain market share. The degree of pass-through also varies by direction: depreciations tend to raise import prices faster than appreciations lower them — an asymmetry documented by the IMF research and the ECB Economic Bulletin.
Why it matters for inflation forecasting
Exchange rate pass-through is a critical parameter in any central bank's inflation model. If a currency depreciates sharply — as sterling did in 2016 (Brexit vote) and 2022 — the central bank must estimate how much of that depreciation will feed into CPI and over what timeframe. Underestimate pass-through and you undershoot on tightening; overestimate and you tighten too much. The Bank of England Monetary Policy Report August 2022 is a useful case study of how sterling weakness was incorporated into the UK inflation forecast. For country comparisons, use our inflation explorer to visualise how inflation tracks across open vs closed economies.
Common misreadings
"A weak currency always causes high inflation" — the link depends heavily on openness and pass-through rates. Japan has had persistent currency depreciation episodes with very little CPI pass-through due to low import intensity of consumption and deflationary expectations. Small open economies like New Zealand or the Czech Republic see much faster and larger pass-through. The OECD and BIS publish country-level estimates of exchange rate pass-through coefficients for use in inflation forecasting models.
Frequently asked questions
Why do some countries experience more exchange rate pass-through than others?
Pass-through tends to be higher for: (1) small open economies that import a large share of consumption; (2) countries that invoice imports in foreign currency (especially USD); (3) economies with less competitive domestic markets (firms can pass on FX costs more easily). Advanced economies like the US have low pass-through because the dollar is the invoicing currency for most of their trade — a weaker dollar doesn't make USD-invoiced imports more expensive. Small commodity-importing economies (Armenia, many sub-Saharan African countries) have high pass-through because their imports are priced in dollars or euros. The BIS has published extensive research on pass-through asymmetries.
How long does it take for exchange rate changes to affect consumer prices?
The pass-through happens in stages. Import prices at the border adjust within 1–3 months of a significant exchange rate move. These then pass through to retail prices over 3–12 months, as contracts are renegotiated and distributors absorb or pass on the cost. Full pass-through to consumer prices can take 12–18 months in advanced economies. In countries with high import dependence and less price-setting power, it can be faster. Central banks building inflation forecasts have to model these lags carefully.
How does exchange rate pass-through affect Armenia's inflation?
Armenia is a small open economy that imports a high share of energy, food, and manufactured goods, many of which are priced in USD or EUR. When the Armenian dram weakens against the dollar, import prices in dram terms rise, which directly feeds into CPI — especially the food and energy components that together represent roughly 40% of Armenia's CPI basket. The <a href="https://www.armstat.am" target="_blank" rel="noopener noreferrer">Statistical Committee of Armenia (Armstat)</a> and the <a href="https://www.cba.am" target="_blank" rel="noopener noreferrer">Central Bank of Armenia</a> both publish inflation and exchange rate data. Our <a href="/?country=ARM" class="gfaq-int">Armenia inflation chart</a> shows the historical trend.