Falling dollar and the inflation connection

[zmas28]

I was under the impression that a falling dollar implied high inflationary pressure directly because of increased import prices, etc. But in viewing a recent interview by Ken Rogoff on the Bloomberg channel, I was struck by his comment that the transmission mechanism is slow. If I heard him correctly he said that 97% of imports are priced in dollars anyway (oil, etc?) so the "pass-through" to inflation is quite slow.
He was commenting on the recent drop in the trade-weighted dollar following the Fed's cut in interest rates. He did say that this drop could be the start of the "Big Kahuna" for a dollar drop, and said that such a precipitous fall in the dollar was a certainty (if not now, then in the next few years).
link: http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vTdF9vowI7XA.asf

[Rajiv]

If I heard him correctly he said that 97% of imports are priced in dollars anyway (oil, etc?) so the "pass-through" to inflation is quite slow.


In terms of oil, it is only so far as existing delivery contracts. For the new contracts, they are already being priced higher as per the spot price of oil. As far as inflation is concerned, you would have noticed that the price of gasoline to the ultimate consumer appears to be pegged to the spot price and not to the contracted prices.

Similar outlooks for other imports. The inflation pass through will depend on the contractual prices (and escape clauses in them) as well as the competitive situation among suppliers. Given that most suppliers already operate at very low margins (they are much lower than is customary in the US!) -- the inflationary impacts will be quite rapid.

[zmas28]

OK, thanks, Rajiv. But, if the currencies are pegged to the dollar, then the margins might not change? In this case, the falling dollar would not have as direct an effect.

[Rajiv]

Yes that would be true. But no currency is 100% pegged to the dollar. Even Saudi Arabia (http://itulip.com/forums/showthread.php?p=16333#post16333)has refused to go along with an interest rate cut. Many OPEC countries are moving toward accepting payment in Euros. China possibly has been dumping US treasuries (http://itulip.com/forums/showthread.php?p=15553#post15553). The Indian Rupee is close to a 10 year high.

If every currency was pegged 100% to the dollar, the dollar would not be falling!