The woes of emerging economies could temper the Fed’s tapering in coming months by strengthening the dollar, which could push U.S. inflation closer to zero. The J.P. Morgan Trade-Weighted Dollar index has been trending higher since mid-2011. A strong dollar tends to depress inflation.
Indeed, the U.S. import price index excluding petroleum has been falling over the past 10 months on a year-over-year basis through December, when it was down 1.3%. A stronger dollar would be bad news for commodity producers, especially in emerging economies. When the dollar is rising, commodity prices tend to fall. Weak commodity prices have depressed the currencies of commodity-producers Canada and Australia over the past year.
The latest FOMC statement noted that near-zero inflation could be a problem for the U.S. economy: “The committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”
The emerging markets crisis, strength in the dollar, and weakness in commodity prices could frustrate the Fed’s expectations that inflation will rise back closer to 2%.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.