Estimating Chinese Yuan Reminbi pass-through to US import prices and activity

The effect of CNY depreciation on US inflation depends on the magnitude of the CNY move and the policy reaction of other Asian economies. For this exercise, Barclays assumes that the CNY depreciates 10% against the US dollar and that all remaining Asian currencies, including the JPY, follow suit. These countries account for about 44% of US imports. Even though the assumption may seem unrealistic, particularly in the case of JPY, the exercise believed to be characterized an upper bound of the effect on the US economy. 

A 10% depreciation of all Asian currencies would be equivalent to a 4-5% appreciation in the nominal effective USD exchange rate. Barclays states, based on their prior pass-through estimates of changes in the dollar, this change would imply a cumulative 2.0% decline in nonpetroleum import prices and a 0.2pp decline in PCE inflation over a four-quarter horizon.

"US core PCE inflation is expected to rise to 1.7% and 1.8% y/y in Q3 and Q4 16, respectively. A strong depreciation in all Asian currencies against the USD would attenuate the rate of firming in core inflation, but would not alter its upward trajectory", estimates Barclays.