Has the pandemic shown inflation to be a fiscal phenomenon?

H ERE IS A potted history of recent economic policy and inflation. In the 2010s central banks created vast amounts of money through their quantitative-easing ( QE ) schemes, while governments enacted fiscal austerity. Inflation in the rich world was mostly too low, undershooting central banks' targets. Then the pandemic struck. There was plenty more QE . But the truly novel economic policy was the $10.8trn in fiscal stimulus implemented worldwide, equivalent to 10% of global GDP . The result was high inflation. The rich country that has splurged the most, America, has had the most inflation. With consumer prices rising at an annual pace of 6.8%, the Federal Reserve on December 15th was forced to acknowledge that inflation had become a big threat. At first glance, this apparent supremacy of fiscal policy is awkward for fans of Milton Friedman's view that inflation is "always and everywhere a monetary phenomenon". Central banks, not governments, are charged with hitting inflation targets. But does the experience of the pandemic show that inflation is really fiscal? One way in which fiscal stimulus boosts inflation is by strengthening households' and firms' balance-sheets, making them more likely to spend. Suppose the government raises cash from… Read full this story

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