Sources of the Problem

• If the US inflation rate rises it could be expected that other country’s inflation rates would rise too.

• Has the dollar become unstable?

• Is the source of the extra inflation the need for a real appreciation of the home country? E.g., because of an increase in oil prices (in an oil-exporting country)

• The cause could also be a need for a decline in the real exchange rate of the dollar.

• The problem could be a weak dollar and a high euro.