The surge in government debt caused by ballooning fiscal deficits is a necessary response to the coronavirus crisis. Even if governments fail to meet existing fiscal consolidation plans, which we think is likely, we doubt it will lead to a burst of inflation in the advanced economies (AEs), let alone a debt crisis.
While many have flagged a sustained period of loose fiscal policy as a key inflation risk, a slower narrowing of fiscal deficits than we forecast wouldn’t automatically lead to a period of above-target inflation. Indeed, we wouldn’t be surprised if larger-than-expected deficits were associated with weak inflation.
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