Surging public debt and inflation – lessons from history

▀ Soaring public debt in many economies has sparked fears that inflation could rise sharply. But our historical analysis suggests government debt surges have a wide range of inflation outcomes, with higher inflationary risk more frequent when accompanied by monetary expansion. ▀ For a sample of 66 public debt surges going back over 200 years we find the median rise in inflation is only around one percentage point ‐ roughly in line with our baseline forecasts for the next few years. Many public debt surges are associated with financial crises and deflationary conditions. ▀ Overall, though, risks are skewed toward higher inflation outcomes with a third of our episodes seeing inflation rising by over five percentage points. ▀ A key factor determining inflationary outcomes is whether public debt surges are associated with significant monetary expansions. Median rises in inflation in cases of monetary expansion are around four percentage points for advanced economies and more than double that for emerging economies. ▀ Inflation risks also vary greatly by period ‐ public debt surges seem to have become less inflationary over time. This partly reflects recent episodes being financial crisis‐related but may also reflect better monetary frameworks. ▀ The fact that recent public debt surges have been accompanied by strong money supply growth increases inflation risks. We still believe that the unusual nature of recent monetary expansions limits these risks (including for emerging economies). But if we are wrong, inflation rises could be significant.