How exchange rates and currency moves affect inflation
A falling currency raises import prices. A rising currency suppresses them. Here is how to read the exchange rate–inflation link, measure it, and understand why the pass-through varies across countries.
When a currency depreciates, imported inflation rises: the same basket of goods now costs more in domestic currency. When a currency appreciates, import prices fall and inflation can be suppressed. This transmission from exchange rate movements to consumer prices is called exchange rate pass-through — and understanding it is essential for interpreting inflation in any economy that trades with the world (which is all of them).
This guide covers how to measure pass-through, why it varies across countries, and where to find the data to trace the exchange rate–inflation link for any economy on our inflation explorer.
Understand the pass-through chain
Currency depreciation does not immediately raise consumer prices. The transmission happens in stages:
- Import prices (immediate): A 10% depreciation raises import prices by approximately 10% in domestic currency — this happens within days to weeks. The BLS Import Price Index captures this for the US.
- Producer prices (1–3 months): Higher import prices raise costs for manufacturers who use imported inputs. This shows up in PPI within 1–3 months.
- Consumer prices (3–12 months): Higher producer costs eventually pass through to retail prices — but the pass-through is incomplete. Retailers absorb some of the increase in margins, especially when consumer demand is weak.
This is why a sharp currency move takes 6–12 months to fully appear in CPI. Economists call the fraction that reaches consumer prices the "pass-through coefficient" — empirically around 0.1–0.4 for advanced economies (a 10% depreciation raises CPI by 1–4%).
Why pass-through varies across countries
Pass-through is much larger in small open economies than in large closed ones. Armenia, where imports are over 50% of GDP, has a very high pass-through: a 10% dram depreciation can raise consumer prices by 3–5% within a year, concentrated in food and energy which make up 40%+ of the CPI basket. Armenia's 2022 inflation spike was partly driven by this channel: as regional currencies gyrated, import costs rose sharply.
The US, by contrast, has low pass-through (~0.1): domestic production supplies most consumption; the dollar is the invoicing currency for most global commodity trade (so commodity prices are dollar-denominated regardless of the exchange rate); and the US runs a large services economy where imported inputs matter less. The eurozone is intermediate — significant trade with non-euro countries but a large internal market that buffers external shocks.
Track exchange rate trends alongside inflation data for any country on our inflation explorer. The World Bank official exchange rate series provides historical currency data for 200+ countries.
Find import price and exchange rate data
Three key data sources for tracing the exchange rate–inflation link:
- BLS Import Price Indexes: bls.gov/mxp — monthly import price data for the US, broken down by commodity and country of origin. The "end-use" import price series is most useful for CPI pass-through analysis.
- BIS Effective Exchange Rate Indices: bis.org/statistics/eer — nominal and real effective exchange rates for 60+ currencies, trade-weighted. The real effective exchange rate (REER) adjusts for inflation differentials and is the best measure of international competitiveness.
- IMF International Financial Statistics: data.imf.org — exchange rates and import price deflators for IMF members. The IMF's World Economic Outlook also discusses exchange rate–inflation dynamics in detail for each country in the projections.
Apply it: reading a currency-driven inflation episode
When you see a sharp inflation spike in a small open economy, the first question is: was the exchange rate involved? A practical checklist:
- Check if the currency depreciated significantly (15%+) in the 3–12 months before the inflation spike.
- Look at the CPI breakdown: if food and energy led the spike, currency pass-through is likely (these categories have the highest import content and fastest pass-through).
- Check if services inflation also rose: if yes, the currency depreciation has triggered second-round wage effects — more persistent. If services stayed contained, the shock may be transitory.
- Look at import price data if available, or estimate it from the exchange rate move × import share of GDP.
Turkey's 2021–23 inflation episode is a textbook example: the lira fell 70%+ against the dollar, imported food and energy prices surged, and because Turkey is a heavily import-dependent economy with weak monetary policy credibility, second-round effects were severe — inflation expectations became unanchored and services inflation followed. See our Turkey inflation analysis for the full story.
Distinguish currency pass-through from other inflation drivers
A common misreading: attributing all import-driven inflation to the exchange rate when commodity prices (in dollars) moved independently. If global oil prices rise 30% and the exchange rate is unchanged, import costs still rise 30% in local currency — this is a commodity shock, not a currency effect. To isolate the currency contribution, you need to hold commodity prices constant (or control for them in a regression).
The reverse applies too: a currency appreciation can mask domestic inflation. If the domestic money supply is growing rapidly but the currency is being held strong (e.g., by central bank intervention), import prices stay suppressed even as domestic demand pulls prices up. This "overvaluation" situation eventually breaks — the currency adjusts sharply, and import inflation surges. Understanding the distinction between demand-pull inflation and imported inflation is the foundation of any credible inflation decomposition. Our OECD data guide shows how to access the harmonised series needed for this analysis.