The theory of purchasing power parity predicts that a country's currency will depreciate if its inflation is higher, all else equal.

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The theory of purchasing power parity states that exchange rates should adjust so that the same basket of goods and services has the same price in different countries. If inflation is higher in one country than in another, the price of the basket of goods and services in the country with higher inflation should increase more quickly than in the other country, leading to a depreciation of its currency. Therefore, higher inflation is expected to lead to a depreciation of a country's currency in accordance with the theory of purchasing power parity.

The Theory of Purchasing Power Parity Predicts That a Country's