Inflation import

Inflation itself means an increase in the average level of prices and goods in the economy. The causes of inflation may be different and may relate to monetary, credit, budgetary and investment policy. They arise in case of economic disparities, when the value of the domestic currency falls in relation to the foreign one, or there is an increase in fuel and energy prices on international markets.

One of such reasons is the import of inflation. It is influenced by global inflation. Inflation imports consist in transferring rising prices from the world market to the domestic market. It reflects the increase in the prices of articles imported by a given country together with an increase in production costs. Import of inflation is particularly marked in the conditions of rising prices of raw materials, food and fuels on global markets. At that time, the prices of imports of these goods increase as a result of which domestic prices increase, which intensifies and deepens inflation. The consequence of this for the national economy may be the reluctance of entrepreneurs to invest, where real profits can not be predicted, as well as the devaluation of the national currency, a decrease in productivity, which is associated with an increase in credit maintenance costs and a weakening of the creditor's credibility. Saudi Arabia is a good example of importing inflation through its link with the US dollar. The source of inflation in Saudi is the increase in import costs with a drop in the value of the dollar against the yen, the euro and other currencies. The US is the source of only about 12 percent of imports from Saudi Arabia. A 15 percent fall in the value of the dollar against these currencies meant that the prices paid by Saudis for goods purchased in Europe, Japan and other countries increased by over 15 percent. The large trade deficit in the US is important, which will probably force the dollar to fall in relation to other currencies. The result will be further imports of inflation to Saudi Arabia and other countries whose currencies are linked to the dollar. The effects of this will continue to affect both the society and the national economy.

Inflation import — recommended articles

Domestic demand — Over-valued currency — Cost inflation — Maritime transport — Arthur Cecil Pigou — Globalization — Currency depreciation — Closed economy — Price risk

References

• McCarthy, J. (2007). Pass-through of exchange rates and import prices to domestic inflation in some industrialized economies. Eastern Economic Journal, 33(4), 511-537.
• Gruben, W. C., & McLeod, D. (2004). The openness-inflation puzzle revisited. Applied Economics Letters, 11(8), 465-468.
• Ihrig, J., Kamin, S. B., Lindner, D., & Marquez, J. (2010). Some simple tests of the globalization and inflation hypothesis. International Finance, 13(3), 343-375.