Wait.. how can that be true? If a dollar last year is worth .5 dollars today, and a Euro last year is worth .8 Euros today, then surely the value of the dollar against the Euro has declined to .5/.8 of what it was last year?
Exchange rates affect inflation for imports, but not for domestic goods. So varying exchange rates by 5% might only change inflation by 1-2% (depending which inflation metric you use).
Like many things in macroeconomics, the exchange rate / inflation relationship should be true in equilibrium. But several things are out of equilibrium right now due to supply chain disruptions and a demand surge after the pandemic.
This is an interesting observation! If you follow that train of thought, it might be possible for there to be a situation where in the United States, you can trade one dollar for .8 Euros, and in Europe, you trade one Euro for .8 dollars. In that case there is no single number for exchange rate. This could be the case because in order to spend your US dollars from Europe, you would have to travel to the USA, buy something, and then import it back, and vica versa. So how do exchanges quote a single number for exchange rate?
> several things are out of equilibrium right now due to supply chain disruptions and a demand surge after the pandemic.
And some things (most of them actually) are never at their equilibrium price for many reasons (but mostly because the characteristic time to reach equilibrium is higher than the frequency of perturbations). A bit like how it's completely fine to still have snow outside even if the temperature is firmly above zero Celsius.
