Inflation Will Increase If Government Spending Spree Continues: Study

Central banks including the Federal Reserve will fail to curb inflation unless governments start to be responsible for spending, according to a study presented to central bankers at a Jackson Hole conference in Jackson Hole, Wyoming.

The authors of the study, Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed, warned that increasing interest rates would end up in stagnation without adequate constraints on government spending.

“If the monetary tightening is not supported by the expectation of appropriate fiscal adjustments, the deterioration of fiscal imbalances leads to even higher inflation pressure. As a result, a vicious circle of rising nominal interest rates, rising inflation, economic stagnation, and increasing debt would arise,” they wrote in the study (pdf).

If governments are not spending money responsibly, inflation will be driven up by the private sector’s expectations of high inflation while at the same time the economic output is reduced by hawkish monetary policy, they explained.

“The more hawkish monetary policy would have lowered inflation by only 1 percentage point at the cost of reducing output by around 3.4 percentage points,” the authors wrote. “This is a quite large sacrifice ratio.”

Spending Spree Is Back

After a short pause following the wave of COVID-related stimulus spending, government spending is back in the United States.

President Joe Biden signed the Democrat-backed “Inflation Reduction Act” on Aug. 16, which includes around $433 billion in new spending. The Democrats claimed that the bill will reduce the deficit by around $292 billion annually through stricter tax code enforcement.

President Joe Biden signs the Inflation Reduction Act as Democrat lawmakers look on at the White House in Washington, on Aug. 16, 2022. (Drew Angerer/Getty Images)

The president also announced a massive student loan cancellation plan on Wednesday.

According to the plan, individuals earning less

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