Currency Fluctuations and Import Costs
The cost-of-living crisis in open economies is also influenced by currency fluctuations, since exchange rates affect the prices of imported goods and raw materials. During the recent inflationary period, the U.S. dollar strengthened significantly, while currencies like the British pound and the euro weakened at points – adding extra inflation pressure in those regions by making imports more expensive. Meanwhile, China’s currency (the yuan) has been more stable or even managed lower to support exports, which has different implications. Let’s unpack how exchange rates played a role in the U.S., U.K., and EU cost-of-living trends.
In 2022, as the Federal Reserve raised interest rates aggressively and investors sought safe havens amidst global uncertainty, the U.S. dollar surged in value. The dollar index (DXY) hit its highest in 20 years. Against that, the euro fell to parity with the dollar (1:1) for the first time since the early 2000s, and the British pound, as mentioned, briefly crashed to near $1.03 in late 2022 after the ill-fated mini-budget. Overall, the dollar was about 10% stronger in 2022 on average against other major currencies. For the U.S., a strong dollar can actually mitigate inflation: imports (like consumer products, electronics, clothing, and oil priced in dollars) become cheaper in dollar terms. Indeed, some economists noted that U.S. inflation may have been tempered a bit by the strong dollar in 2022, as it helped offset rising global commodity prices. However, a strong dollar also hurts U.S. exporters and manufacturing jobs, so it’s a mixed bag. But in terms of cost of living, Americans benefited from relatively cheaper import prices than they would have had with a weak currency. (It’s one reason U.S. inflation peaked at ~9% while the eurozone hit ~10.6% – not the only reason, but a contributing one.)
Conversely, the weakening of the pound and euro directly fed into higher inflation in the U.K. and euro area. Commodities like oil and gas are typically traded in dollars. So when the pound/euro fell, it meant those countries had to pay more in local currency for the same barrel of oil or shipment of LNG. For example, Europe’s big energy import bills in 2022 were exacerbated by the euro’s decline (it dropped below $0.99 at one point). The European Central Bank explicitly noted that “spillovers through a stronger US dollar” have a significant impact on eurozone inflation. One analysis estimated that the weaker euro added about 1 percentage point to European inflation in 2022 by raising import prices. In the U.K., the pound’s weakness post-Brexit and during 2022 made imported food and goods pricier; the LSE study on food prices attributed some of the £6bn increase to currency depreciation as well as trade frictions.
The extreme case was the U.K.’s mini-budget turmoil: the sudden drop in sterling’s value raised the cost of imported goods across the board. It also unsettled markets such that the Bank of England had to intervene to stabilize bond markets, and lenders pulled mortgage offers due to interest rate uncertainty – creating chaos that ultimately filtered down to households via higher borrowing costs (as noted earlier) and likely higher inflation expectations. While that episode was short-lived (the pound recovered to around $1.20 after the policies were reversed and a new government took over), it showed how poor policy can trigger currency crises that directly hit living costs.
Emerging market currencies were also impacted. A strong dollar tends to weaken many emerging currencies and increase their import costs, especially for food and fuel, often causing inflation and even crises (Sri Lanka’s 2022 meltdown was partly due to inability to pay for imports). While not the main focus here, it’s worth noting that the cost-of-living crisis has been global – countries from Ghana to Pakistan saw high inflation, often aggravated by currency depreciation and the strong dollar, which raised the local price of essentials and debt servicing costs.
China’s yuan, meanwhile, is somewhat managed by its central bank, but it did drift weaker against the dollar in 2022 (crossing 7 yuan per dollar, the weakest in ~15 years). A weaker yuan helped Chinese exports remain competitive, but it also can raise the price of imports (like oil, which China imports heavily). Yet Chinese inflation remained low – why? One reason is that domestic demand was soft (due to zero-COVID policies and property downturn), so even if imported energy got pricier, overall price pressure stayed modest. Also, the Chinese government often employs price controls or subsidies on certain staples if needed, muting how currency changes hit consumer prices.
Another aspect is how import dependency in critical sectors influences cost of living. The U.K., for example, imports a large share of its food (over 40%) and almost all of its natural gas (until recently much from the North Sea, but it’s declining, plus imports via Norway and LNG). So a weak pound directly means supermarket prices up and heating costs up. Japan, similarly energy-import dependent, saw core inflation rise when the yen hit a multi-decade low against the dollar in 2022. The Bank of Japan had to intervene to prop up the yen, because import prices (especially for fuel) were spiking – an unusual position for Japan, which hadn’t worried about inflation in decades.
Currency fluctuations also tie into monetary and fiscal policy credibility. Countries that raised interest rates faster generally saw their currencies strengthen (like the U.S.), which then feeds back into inflation. Conversely, those behind the curve (ECB was slower than Fed initially) or with policy uncertainty (U.K. during Truss) saw currency hits that worsened inflation. This interplay complicated central banks’ jobs: the ECB was concerned that if it lagged, euro weakness would import more inflation.
In practical terms for households: exchange rate effects are most visible in fuel prices (global market) and imported goods like electronics, coffee, clothing brands, etc. For instance, British consumers saw electronics and appliance prices rise partly due to the weaker pound increasing import costs (since many such goods are imported from Asia priced in dollars). European drivers felt additional pain at the pump from the weak euro/dollar dynamic on top of oil’s surge.
One could say the U.S. exported some of its inflation via the strong dollar. There is truth to that – America’s rate hikes and growth pulled capital in, boosting the dollar, which then made U.S. imports cheaper but others’ imports dearer. China, interestingly, exported deflation in 2023 (by having cheap exports and weak domestic demand, it kept global goods prices down). This interplay highlights that cost-of-living issues have international linkages; one country’s policy can spill over.
Finally, trade policies (beyond currency) can also affect import costs. The WEF article pointed out that U.S. tariffs – especially the tariffs on Chinese goods first imposed in 2018–2019 (which average around a 19% rate on $300+ billion of imports) – are a factor pushing up U.S. prices for certain goods like furniture, appliances, and clothing. It cited a “nearly eight-fold increase” in the U.S. average tariff rate, which contributed to higher consumer prices for those items. Tariffs function like a sales tax on imports – they were largely absorbed by importers/consumers, not foreign producers, studies found. That “trade war inflation” is small in the grand scheme but not negligible (perhaps adding a few tenths of a percent to U.S. CPI). In Europe, tariffs weren’t a big issue, but Brexit effectively acted like new tariffs on U.K.-EU trade.
In conclusion, currency and trade factors have been an underappreciated cause of the cost-of-living crisis. They operate in the background, influencing the prices of internationally traded goods and inputs that feed into consumer prices. For the U.K. and EU, unfavorable currency moves amplified the inflation imported via energy and goods. For the U.S., a strong dollar provided a slight relief on goods inflation but tariffs added some costs elsewhere. And for China, a stable/managed currency with mild depreciation contributed to keeping its inflation low (and even exporting deflation abroad). It’s a reminder that in a globalized economy, what you pay at the store is tied not just to local factors but also to the gyrations of foreign exchange markets and trade policies decided in far-off capitals.