I’m thinking mainly of the US dollar. Is the inflation rate in the US reflected in other countries which use the dollar or which have currencies pegged to the dollar?
Is this different in the EU, where no one country emits the shared currency?
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Let’s look in the US where certain areas have a higher cost of living. In these areas, prices for things like housing and services are inflated because of increased demand (lots of people in one area) and limited supply (difficult to add more housing, harder to transport goods).
In general, this is balanced out by companies providing more pay. Minimum wages in high cost of living areas are usually increased and average salary is higher.
This does push out poorer people as it gets harder to afford to live in an area as the cost of living increases.
We’re seeing this effect spread due to the pandemic as people are able to work from home. They take their high cost of living salary and move to a low cost of living area. Their money goes a lot farther but it does end up increasing the cost of things in their new area.
The bigger concern is not the far away inflation, it is how that country controlling your currency decides to deal with it.
If the US has high interest rates, then the Federal Reserve will raise interest rates. If you are not experiencing inflation where you are and are more worries about unemployment and/or servicing your dollar-denominated debt, then you may not like the higher interest rates one bit.
This did happen in Europe. The northern countries (Germany, France) have very large economies and monetary policy is often tailored to their needs. If the southern countries, (Greece, Spain) are having Euro-denominated debt issues, they might like lower interest rates and moderate inflation, but the larger economies may want the opposite instead.
I read the other 2 comments before me and I think there is one thing that needs to be clarified: inflation (prices going up somewhere) does not automatically translates into currency depreciation (weaker exchange rate of the USD, for instance). Yes, too much inflation can lead to currency depreciation, but it’s not a direct and immediate cause-effect relationship. Countries pegged to the USD would most likely experience inflation as a consequence of USD depreciation and the cost of imported goods going up.
Pegging your currency to the dollar is very much like pegging your currency to gold. In fact, they are almost exactly the same. People seem to forget that gold in of itself has inflation and deflation. And for a country that pegs their currency to the USD, they’re saying that their currency is worth x amount of USD just like back “in the day” when you could exchange a USD for its value in gold. And as you probably had a suspicion about, can be VERY bad for an economy. It’s precisely why we’re on a fiat system and not a gold system.
One good example would actually be the different areas of the US itself. Each state has its own cost of living. Living in New York is going to cost a lot more than living in Alabama. Inflation for gas prices in New York will be different from inflation of gas prices in Alabama. Same for housing and such. However, prices for imported goods like iPhones are the same for both places and will face the same rate of inflation because it’s an imported good that isn’t impacted by unique factors like New York and Alabama having very different housing markets or sourcing their gas from refineries in different parts of the country. For a country that pegs its currency to the USD, completely domestically sourced goods and services might not see the same level of inflation. But they definitely will see the same inflation for imported goods.
This can wreck havoc on a foreign economy because they’re subject to the financial policies of the US. And the US’s financial goals are going to be very different from a smaller country with a less diverse industrial base. They wouldn’t be able to do anything to control inflation locally and that can completely destroy their domestic industry. In fact, one of the only reasons the US financial system has been as stable as it is with such a diverse variety of states is the fact that the US government redistributes wealth from wealthy states to less wealthy states. Without this rebalancing, the US would be seeing the Greek crisis plying out extremely frequently and these poorer states completely falling apart. That’s not going to happen for a foreign country pegging their currency to the USD so they are at a very real risk of seeing that same sort of crisis but worse.
A country doesn’t experience inflation, a currency does. Usually, an individual country with its own currency has the power to control how much currency flows in the economy through the interest rate and can lower or raise taxes to help stimulate or slow down the economy. The EU on the other hand has one central bank and 27 different countries with 27 different governments with different tax policies.
Yes, this totally happens. Greece had a lot of inflation, but they use the Euro now. That made the other Euro countries mad, and they applied political pressure to Greece to change things and get its inflation under control.
Currencies pegged to the dollar are in tiny countries that wouldn’t have liquidity if they tried to have an independent currency, or countries where past inflation disasters have made speculators wary of their currency (talking about you, Zimbabwe).
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