Differential inflation

One of the reasons behind these numerous asymmetric and weak relationships between monetary policies and currency movements is the different inflation rates in the U.S., UK, and Eurozone. If we compare the American consumer price index (CPI), the British retail price index (RPI), and the Euro “harmonized index of consumer prices” (HICP — can those bureaucrats in Brussels come up with catchy names, or what?) over the past three decades (just one decade for the HICP), we find the British have the greatest endemic problem with inflation. It has exceeded the U.S. rate since 1975 and the HICP since its origin in 1996. All else held equal, a higher inflation rate should lead to both higher nominal interest rates and pressure for a weaker currency in their absence. This has been confirmed by historic experience.