How does inflation in the US or China impact the USD/RMB rate?

How US and China Inflation Steers the USD/RMB Exchange Rate: Stories from the Trading Desk

Why Does Inflation Even Matter for the USD/RMB?

Let me cut straight to the chase—if you’re wondering why inflation in either China or the US makes currency traders (and even casual importers) so nervous, it’s because inflation hits the real value of money, which then ricochets through the exchange rate. But here’s the trick: it doesn’t always play out like the textbooks say. I still remember the first time I tried to hedge a payment to my Chinese supplier back in 2018. The US inflation numbers had just come out high, the RMB seemed to be strengthening, and I assumed (wrongly, as it turned out) that my dollar invoice would get less expensive in RMB. My broker laughed and told me to watch what the People’s Bank of China (PBOC) did next—not the inflation release. Spoiler: central bank intervention changed everything. But I’m getting ahead of myself.

Step-by-Step: Inflation’s Journey to the USD/RMB Rate

Let’s break it down the way I wish someone had done for me when I started:

1. Inflation Rises in the US: Suppose US inflation ticks up. In theory, that makes the US dollar less attractive because its buying power is eroding. Investors may expect the Federal Reserve to hike rates in response, which could make the dollar stronger, not weaker—contradicting the old-school thinking.
2. China’s Inflation Accelerates: If Chinese inflation rises while US inflation is stable, the RMB should, in a vacuum, weaken. Goods from China get relatively more expensive, and investors might move their money out. However, the PBOC doesn’t always let this happen freely.
3. Other Factors Crash the Party: Trade balances, capital controls, and global risk sentiment all mess with the tidy inflation-to-exchange-rate pipeline. China’s capital controls, for example, often dampen what would be a bigger move in a floating currency.

Here's a screenshot from FRED showing how USD/RMB moved after key inflation releases. Notice the lags and reversals—nothing is ever linear.

Case Study: When Theory Hits Reality

Let’s look at the spring of 2022. US inflation was running above 8% (see BLS CPI data), while China’s consumer inflation hovered around 2%. Intuitively, you’d expect the RMB to strengthen—after all, its purchasing power wasn’t eroding as fast. But what actually happened? - The Federal Reserve began hiking rates aggressively. - The dollar surged, and the RMB weakened, despite the US having higher inflation. - Why? Higher US rates pulled capital into dollar assets, overpowering inflation’s usual effect. I remember a Shanghai-based logistics manager venting in a WeChat group: “We expected a stronger RMB, but now our import costs are exploding. The traders all say it’s because of the Fed—not our CPI.” He was right.

Expert Viewpoint: When Central Banks Call the Shots

I once asked an FX strategist from HSBC (on a webinar, not in person) about this disconnect. Her answer stuck with me:

“In the US-China corridor, inflation only matters if it changes central bank policy. The PBOC’s managed float means they can and do offset pure inflation moves. Watch the policy, not just the price indices.”

That’s echoed in IMF research (see IMF paper), which notes that China’s exchange rate regime buffers direct inflation impacts.

Verified Trade: Standards Table—US vs. China

Below is a quick reference to how “verified trade” is defined and enforced differently in the US and China, which can affect how inflation flows through to real-world pricing and settlements:

Country	Standard Name	Legal Basis	Enforcement Agency	Notes
United States	Customs-Trade Partnership Against Terrorism (C-TPAT); Importer Security Filing (ISF)	19 CFR Part 149; USTR rules	US Customs & Border Protection (CBP), USTR	High transparency, open access to compliance rules (CBP C-TPAT)
China	China Customs Advanced Manifest (CCAM); China Compulsory Certification (CCC)	General Administration of Customs Order No. 56; CCC Law	General Administration of Customs (GACC)	More discretion, less transparent appeals process (GACC official site)

Simulated Industry Dispute: A Tale of Two Traders

Imagine Alice, a US auto parts importer, and Li, a Chinese electronics exporter. In 2023, US inflation spikes but the Fed signals no immediate rate hike. Li expects a weaker dollar and delays settlement, but Alice’s bank won’t lock in a forward rate because the PBOC has just intervened to prop up the RMB. Both are frustrated—Alice feels US inflation should weaken the dollar, Li blames the opaque exchange regime. Ultimately, they settle at a worse rate than expected, learning that “inflation” is only part of the USD/RMB puzzle.

What the Official Documents Say

The WTO’s World Trade Report 2018 covers how inflation’s impact on trade can be distorted by currency regimes and trade barriers. The US Treasury’s Exchange Rate Policies report routinely flags China’s managed exchange rate as a key risk to “market-determined adjustment.”

Personal Take: It’s Never Just About Inflation

Here’s what I’ve learned, sometimes the hard way: inflation is a key actor, but it’s rarely the lead in the USD/RMB drama. Watching headline CPI numbers won’t make you a successful trader or even a savvy importer. You have to follow the central banks, the capital flows, and the quirks of each country’s legal and policy framework. And sometimes, you just have to accept that the exchange rate will surprise you—often at the worst possible moment.

Conclusion and Next Steps

To sum up: inflation in either the US or China can influence the USD/RMB rate, but the effect is filtered through central bank actions, trade policies, and each country’s approach to “verified trade.” If you’re managing payments or exposures in this corridor, don’t just watch inflation—track policy statements, regulatory updates, and actual trade settlement rules. For your next step, I’d suggest setting up alerts for both the Fed and PBOC policy moves, and subscribe to updates from CBP and GACC. Also, try running a few scenario tests with real or demo currency trades to see how your pricing would have changed under different inflation and policy backdrops—it’s the only way to get a real feel for the risk. If you want to see more detailed regulatory comparisons, check the official WTO and USTR resources linked above.