As we remarked a few weeks ago (FDI 2020 0919), the US dollar underwent a deflationary surge in value early this year. It reversed sharply to the downside on March 23 with the Federal Reserve’s launch of QE Infinity, igniting a full-on crash. In the spirit of a picture is worth a thousand words, the below chart of the Financology Dollar Index tells the story.
The FDI also tells us what the rate of inflation is. It’s a little more complicated than that, because the rate of inflation depends on over what time frame you measure it. Various figures might be reported for the “current” rate of inflation, depending on whether you’re looking at the last quarter annualized, the last year, or the last five years. This matters even more with the FDI than with conventional inflation measures, because the latter smooth out most of the high frequency oscillations, compared to the weekly detail of the FDI. Inflation measures based on consumer prices are like taking a trailing moving average to the real thing … they smooth and lag the data creating the appearance of a gradually moving phenomenon.
The FDI leaves the filters out.
In the below chart, we can see this clearly in the surge in the value of the dollar into the March 23 top, followed by the crash as the policy response kicked in. According to the data you see plotted in the chart, the dollar has lost 14% of its value in the past year. In other words, the policy response so far has more than compensated for the deflationary impact of the Corona Crash.