Impact of Inflation on Currency Exchange Rates

A country experiences a significant increase in its inflation rate relative to its trading partners. According to the Purchasing Power Parity (PPP) theory, what is the likely effect on the currency exchange rate of this country against its trading partners’ currencies?

Purchasing Power Parity suggests that currencies should adjust in such a way that the same basket of goods has the same cost when priced in different currencies. Therefore, any differences in inflation rates between countries will lead to changes in exchange rates over time.