Comments on the Fed, inflation, the dollar… Narayana Kocherlakota via Bloomberg

Narayana Kocherlakota, in a Bloomberg article, thinks the Fed might be fooled by a declining dollar’s influence on inflation..  Here is a chart showing the trade weighted value of the dollar:

And here is the Fed’s favorite measure of inflation:

“The cheaper dollar pushes up the prices of inputs for U.S. businesses, and gradually shows up in consumer prices. Research by Harvard economics professor Gita Gopinath suggests that a 7 percent fall in the dollar should push up inflation by about 0.1 to 0.2 percentage point in each of the subsequent two years. After that, the effect would subside.

In other words, the recent fall in the dollar should boost inflation in 2018 and 2019, then fade away. Because monetary policy tends to operate with a lag of about two years, this means the Fed will have to be careful about removing stimulus in the next couple years. Otherwise, it could find itself falling short in 2020 and beyond.”