US: A 1% decline in USD would bump up CPI 4 bps - Wells Fargo

Analysts from Wells Fargo, estimate that a 1 percent decline in the dollar would bump up the year-over-year rate of CPI inflation by 4 bps. 

Key Quotes: 

“We view the weaker U.S dollar as an important source of upward pressure on inflation this year.”

“We find the effect of a weaker dollar on inflation is more evident in rising commodity prices than through core consumer goods, but it is a factor in both. A 1 percent decline in the dollar would bump up the year-over-year rate of CPI inflation by 4 bps.”

“From the dollar’s peak in December 2017 to where our currency strategy expects it to be by the end of this year the dollar’s decline will be roughly 6 percent. As a result, the boost to inflation from dollar depreciation should be about two-tenths of a percent; that may be just enough to achieve the Fed’s 2.0 percent target.”

“The effect of a weaker dollar on U.S. inflation is more evident in rising commodity prices than through core consumer products.”

“The dollar and commodity prices tend to move opposite directions due to most commodity contracts being priced in dollars.”

“Our currency strategy team anticipates a continued decline in the value of the dollar throughout 2018.”