In the 1970s, the floating exchange rate replaced the fixed exchange rate of exchange rate fluctuations, inflation has become more important influence. Inflation means the domestic price level rises, when an economy in most of the prices of goods and services in a period of time is generally rises, says the economy experiencing inflation.

Due to the price of a commodity is monetary value, inflation also means that the currency value represents. At home and abroad and commodity markets closely related conditions, generally, inflation and domestic prices of export commodities, will cause the increase and decrease imports of foreign currencies, thus influence on the relation between supply and demand in the country, the exchange rate fluctuations. At the same time, the monetary value of internal external value will affect their decline, weaken the currency of credit in the international market, people will inflation expectations the currency exchange rate will hold the hand, weakening the money into other currencies, leading to the dollar decline. According to the law of one price and the theory of purchasing-power parity, when the country’s inflation rate is higher than other country’s inflation rate, the currency in the actual value of the relative representatives in another country’s currency, currency would decline. Conversely, it will rise. For example, in the 1990s, the Japanese yen and the former Germany mark rate is very strong, is an important reason of the two countries have very low inflation. Britain and Italy’s inflation rate than other western countries often the average of the two countries, so it is imperative to the currency exchange rate. Concretely speaking, the main gauge of inflation rate of change is the producer price index, the consumer price index and retail price index.