The Menace of Fiscal Inflation

ConclusionTo say that“inflation is always and everywhere a monetary phenomenon” is not to say that fiscal policy doesn ’t matter. “Fiscal inflation” is indeed “a menace,” as Cochrane and others have argued. Few experts predicted the shift from low inflation before the pandemic to nearly 9 percent CPI inflation today. Policymakers largely ignored the implications of the post-2008 operating system, the close dance between cumulative federal deficits and M2 growth, and the risk of adhering to the Fed’s “lower for longer” recipe for its policy rate in the hope of stimulating asset markets and the economy without causing high inflation. The impact of FAIT on inflation expectations was also underesti mated. The goal of FAIT was to make up for periods of low inflation with periods of high inflation, but in doing so the FOMC elevated its maximum employment goal and downplayed its price stability mandate. With inflation now at the highest level in 40 years, there could be pressure for increasing th e average inflation target to 3 or 4 percent. To do so would be another step away from long-run price stability.Also, it is important to remember that persistent inflation depends primarily on a continuing excess supply of money, the likely cause of which is fiscal profligacy —and, in the case of the current inflation, large cash transfers directly to individuals and businesses from the U.S. Treasury. Supply-chain effects, to the extent they are a part of the story, sh...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs