No. of Recommendations: 5
I don't know the exact impact of a drop in the dollar on inflation, but I would say that it has not been easy to identify at the very localized level.
I think the lack of an obvious link between a falling dollar and US inflation is primarily the result of two things:
(a) time lag. It could take 2-3 years to show up.
(b) there are just so many other factors that determine inflation in a given year that it's all pretty messy.
Still, I don't think it's a coincidence that domestic US inflation around 2002-2007 was 3.0%/year while the dollar was falling, then 1.5%/year in the next ~9 years while it was rising.
As for what you can do about it, again, two answers:
What can you to do mitigate it for yourself? Have some investments in non-US things. Cash, bonds, or companies with mainly non-USD revenue. Conversely, have your debt denominated in dollars. If investing in the US, prefer exporters (USD expenses and non-USD revenues) to importers.
Since mid March when I converted a lot of currency, I've done better (measured in USD) on sterling cash with interest, as I might have done invested in the S&P which is up 9.2% (in USD), and almost as well in euro cash. I'm sure that is a temporary situation, things don't move in one direction and I'm rarely that well aligned with the current move. But still, it does demonstrate the effect nicely.
What can you do to mitigate it in general? Not much! Longer term that's mostly a function of the government's actions on things like budget balances and (shorter term) maybe 20% unpredictable external factors. But I think it's important to be aware that it's something that's happening, as everybody with assets should understand as much as possible about how the world works. Or if only because financially it's a good time for an American to choose a domestic holiday--Europe probably looks pricey : )
Interesting you mention the extreme notion of getting a job in a different country. I have a friend in Japan who quit her local full time gig for a remote part time one billing in different currencies. The yen was falling so much she's better off.
Jim
