Why inflation’s being stubborn and what might make it more so

While there is compelling evidence that inflation is close to if not past its peak in many economies, there remains huge uncertainty about the speed of the slowdown in inflation. We think the mis-calibration of fiscal support could slow the desired falloff in inflation and delay policy pivots by central banks.

What you will learn:

• AE fiscal policy of today is almost diametrically opposed to pre-pandemic doctrines. Nowadays, budget deficits are aimed at supporting households rather than bailing out industries. As a consequence, government debt levels in quite a few AEs have exceeded target rates embodied in earlier fiscal rules.
• Despite an acknowledgement that expansive support to households played a bigger role in pushing up inflation than first recognized, many governments are now looking to provide even more fiscal support to limit the real-income squeeze.
• Although markets seem fully prepared to shrug off the rising levels of AE public debt, they probably shouldn’t – and not just for the purpose of debt sustainability. Fiscal profligacy aimed at protecting household budgets from shocks, irrespective of income, will slow the pace of decline in inflation.