What a weaker dollar means for inflation

Yahoo

6 days ago

The US dollar (DX-Y.NYB) has fallen this year, and that can have big implications for inflation. RSM chief economist Joe Brusuelas talks about that connection and when the impact of tariffs may start to show in the US economy.
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turning out to the dollar index, it's seen many swings we know amid economic uncertainty. Joe, you highlight what the moves in the currency mean for inflation? Walk us through that.
All right. When you get a sustained 10% decline in the value of the dollar, typically, you should expect to see a 1/2 of 1% increase in inflation over the next 6 to 12 months. We clearly are at that point, even though we had a nice rebound. I think it was 3.3% for the month of July, strongest month for the greenback this year, but nevertheless, the policy mix out of the administration, all points towards a weaker dollar, and I think that's what we're going to get. Moreover, when you take a look at import prices, especially import prices ex petroleum, it tells the tale. We're going to see more inflation and a weaker dollar going forward.
Does Trump want a strong dollar?
I would think he does, and I think, well, I think like all politicians, he wants to have his cake and eat it, too. He doesn't want de-dollarization, clearly, but he wants a weaker dollar because A, it really tends to juice the tech sector, and B, it will provide relief to the beleaguered manufacturing sector that's been in an effective recession for the past couple of years.
Is it too soon to say the kind of impact the softer dollars had during this earnings season, particularly what it's meant for the multinationals?
It's way too early to jump on that bandwagon. I think we're really going to be talking in the fourth quarter earnings, and then next year. Moreover, a lot of those firms that he wants to help are actually having real problems with the tariff issue because, you know, 45% of everything we import goes into domestic manufacturing. So policies at a cross purposes, a good portion of the time this year, which is why that economy slowed to 1.2% growth in the first half of the year, and we think it's not going to do much better. Our forecast for this year is 1.1%.
Can I ask you when we talk about these tariff policies? We've been talking about them all show. There's the near to intermediate impact, but how long do we have to wait to see what the long-term impact is? Meaning, do I have to wait till does it have to be August 2026, and Joe and Josh are back on set for me to really know, okay, it's really boosted manufacturing job. It's really opened up all these new markets for American business. It's really raised this much revenue.
It's a little worse, actually. So as of midnight last night, on once we get to October 5th, we're going to have an effective 18.3% tariff. The real problem is we won't really understand what any of this means, not till October 5th, 2026, but more like October 5th, 2027.
Why? Why do you say that, Joe?
Because it takes so long to pass through the tariff costs. You know, there are four points along the chain. You've got your retail, you've got your consumers, you've got your importers, and you've got your exporters. At each point of the supply chain, you're going to see a bit of it absorbed, a bit of it eaten. When we went through this in 2018, for example, we didn't see the full price of the increase in the price of washing machines, dryers, and dishwashers caused by tariffs show up on consumers' balance sheets until about two years later. Turned out 90% of that cost was eaten entirely by consumers.
So when we talk about whether where the cost falls falls on the value chain, and there was this big debate, maybe it's really the key debate inside the Fed. Tell me if I'm wrong, but this debate about whether the the the tariff induced inflation is one time or transitory persistent. Even if it's one time, it could go on for some time. Is that part of the point?
Well, that's right, and that's why they've been counseling patients because you just don't know. Right now, for all of the noise, right? The tariff rate that's showing up, which is causing revenues to rise, right? And from the Trump administration's point of view, that's an absolutely good thing. It's about 8.85%. It's not 30, it's not 50, it's not 15. But as we get into mid-October, it'll be closer to 20 is my sense because we're still not done with Mexico, and we're still not done with China, and then USMCA has to be renegotiated next year. So this is going to be a variable target. It's going to be a moving target, but nevertheless, if you cause the average price of goods imported in the United States to rise by 18.3%, that's going to be eaten. And here's why we say that. There's a lot of talk that, well, foreign exporters are just eating the price. You know, they're going to engage in invoice pricing. If that was the case, import prices would be falling significantly. They're not. They're actually rising. So that's just not happening. So that means it's not the exporter, it's going to be the importer, the retail, or the consumer. Those points on the chain where those are going to be eaten.
Joe, I can honestly say that given the news flow today, you were the perfect guy to be sitting in that chair.
That's very kind of you to say. Thank you.
Thank you, sir. Thank you so much, Joe.