ECB published an article today titled Monitoring the exchange rate pass-through to inflation. There it noted that exchange rate developments can play an “important role” in shaping the HICP inflation outlook, through “both direct and indirect channels”. The impacts are “spread out over several quarters”. And, the effect could be difficult to detect if it is “offset by a confluence of other factors”. Among the components, “energy and food, non-energy industrial goods” are most sensitive to exchange rate movements.
As the background, Euro appreciated by about 8% in nominal effective terms and by about 10% against the US dollar, between April 2017 and May 2018. The impact of past euro exchange rate appreciation has been clearly visible in import price developments. The report pointed to import prices for non-food consumer goods, which dropped to 2.0% in April 2018, down from 1.3% in 2017. Over the same period, extra-euro area import price inflation for industry (excluding energy and construction), which also affect prices earlier in the domestic production chain, decreased from 3.1% to ‑1.7%.
Producer price inflation, on the other hand, has remained resilient to downward pressure from the exchange rate appreciation. PPI for intermediate goods declined only moderately during the period. PPI of non-food consumer goods increased from 0.2% in April 2017 to 0.5% in April 2018.
Indirectly, euro exchange range can affect domestic price pressure through company profits, “albeit with a somewhat ambiguous overall sign.” The
non-energy industrial goods inflation does not provide a clear sign for significant effects of the exchange rate appreciation.
