Does appreciation of the currency lead to lower inflation?

I came across this interesting table in RBI’s Macroeconomic and Monetary Developments 2007-08. The table (Table 35) is in Chapter 4 – Price Situation.

The Table summarises the Macroeconomic Indicators in a few emerging markets:

Country Consumer Price Inflation Real Efective Exchange Rate
Mar-07 Mar-08 Mar-07 Mar-08
Brazil 3 4.7 -0.3 13.6
China 3.3 8.3 2.1 5.3
Indonesia 6.5 8.2 0.5 -6
Israel -0.9 3.7 2.8 8.8
Korea 2.2 3.9 0 -13.5
Philippines 2.2 6.4 2.9 9.6
Russia 7.4 13.3 5.1 5.3
South Africa 6.1 10.6 -16.8 -12.1
Thailand 2 5.3 7.6 2.6
India 6.7 5.5 0 1

The table shows that despite appreciation of the currency in some countries, inflation has increased. Why do I point this? Well, oft late there has been a lot of debate over this topic. Some economists have suggested that RBI should let the currency appreciate and this will take care of inflation. Some have said this is the only tool RBI has.

But as the  table shows it has not really worked in other countries. For instance see Brazil, China, Israel, Phillipines, Russia, Thailand- in all currency has appreciated between 2007-08 but the inflation has actually increased. The inflation numbers are based on consumer prices and that is why we see lower inflation. I have raised this issue over measuring inflation over wholesale prices and consumer prices here.

Infact, inflation has increased whether the currency has appreciated or depreciated. This is a global phenomenon with rising food prices (see my research here).  

3 Responses to “Does appreciation of the currency lead to lower inflation?”

  1. sachin Says:

    but if the currencies had not appreciated, the inflation would have been even higher….isn’t it?

  2. chandru Says:

    sachin is right if the rupee had been allowed to appreciate to 30 Rs level gold would have been at 800 Rs per gram instead of 1150 now. similar is the case for steel and all other commodities. Subsidising the americans and those who serve americans has to come to an end. China and india have to mutually act and allow their currencies to appreciate.

  3. Amol Agrawal Says:

    Sachin, it is a valid point that if the currencies had not appreciated, then inflation would have been even higher. But then we need to prove it empirically and I have not come across any empirical evidence. And by letting the currency appreciate we are assuming that imports of food products is coming in freely. I am not sure of that as most exporting countries have either little to export because of poor weather or have put restrictions on their exports.

    My point is agriculture has been ignored for quite a while globally and all this rise in prices is a result of the same. The rise in inflation is a global phenomenon and should be here for a while.

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