Purchasing power parity

Relative PPP suggests that a currency with higher inflation should depreciate relative to one with lower inflation over time. For a quote of domestic currency per foreign unit, a forecast is S_future = S_now × (1 + domestic inflation)/(1 + foreign inflation) for a matched one-period example. The direction changes if the quote is inverted. Trade barriers, non-traded goods, capital flows and price measurement mean PPP is not an exact short-term prediction. Apply it as a model with stated assumptions, not a guaranteed exchange rate.