The tight-fiscal, loose-monetary policy mix that defined much of the 2010s is being upended into a loose-fiscal, tight-monetary policy one
Save time by listening to our audio articles as you multitaskA moment of penitence has struck again today—and not just in America. Global inflation has surged to 9.8%, catching policymakers, economists and investors by surprise. Central banks, having spent most of 2021 insisting that inflation was a post-pandemic aberration that would dissipate in a few months, have abruptly changed tack.
This special report will argue that a great policy reversal is under way in the rich world. The tight-fiscal, loose-monetary policy mix that defined much of the 2010s is being upended into a loose-fiscal, tight-monetary policy one. The likely result is a tug-of-war between hawkish central banks and spendthrift governments that will make inflation harder to fight.
America has passed the Inflation Reduction Act, a climate-change law that will also reduce government borrowing. But the disinflationary effect is marginal, and President Joe Biden’s proposed cancellation of student debt will cost roughly twice as much as the act will save.
In theory, big-spending governments plus rising interest rates are a recipe for persistently high inflation and/or a bond-market rout.
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