Consumer prices in the US are observably on the rise across a broad array of products and services. The Federal Reserve’s preferred inflation gauge, the PCE, last week registered a 4.1% annual increase, well above the Fed’s target. The causes of higher prices are well known, ranging from supply chain bottlenecks to raw material scarcity to higher energy costs to a shortage of transportation personnel. Adding to the inflationary mix is strength in the US dollar which has recovered over 6% according to the Bloomberg US Dollar index, comprised of a basket of major currencies. The dollar has recovered to pre-pandemic levels and could strengthen further as the Fed begins to reign in liquidity towards the end of 2022 if not earlier. Continued dollar strength could provide some inflationary relief in the form of lower import prices and could be justified given strong US economic growth and the interest rate differential between the US bonds and the rest of the world. As this week’s chart illustrates though, currency movements are notoriously difficult to predict. [chart courtesy Bloomberg LP © 2021]