What impact does the exchange rate have on inflation?

The impact of the exchange rate on inflation is significant, particularly in relation to import prices. When a country's currency depreciates (loses value), it makes imported goods more expensive. This increase in the cost of imports can lead to higher overall prices within the domestic economy, contributing to inflation. As businesses face higher costs for imported materials and goods, they may pass these costs onto consumers, leading to an increase in the general price level.

Additionally, when the exchange rate fluctuates, it can create uncertainty in pricing, causing inflationary pressures to become more pronounced. For instance, if a country relies heavily on imports for consumer goods or raw materials, a weaker currency can directly translate to higher prices, impacting consumers' purchasing power and the cost of living.

In contrast, while other options present differing perspectives, they fail to capture the direct relationship between exchange rates and inflation, particularly regarding the movement of import prices and its implications for the economy.