Inflation: Today's Financial Pandemic

Every American has felt the effects of the staggering surge in inflation in the past few years. In the U.S. and other countries in the Organisation for Economic Co-operation and Development (OECD), the rise in inflation strongly relates to increases in transfer payments since 2020, the start of the COVID pandemic.

Heritage Distinguished Fellow in Economic Thought Dr. Robert Barro has researched this significant inflation spike, and his conclusions may surprise you. Through a conceptual framework based on the government’s intertemporal budget constraint, we can see that the inflation surge is a way to “pay for” part of added government spending by depreciating the real value of public debt. In this framework, more spending triggers more inflation, but higher initial debt and longer debt duration mean lower inflation. This can explain recent inflation rates in 21 economies (20 non-European countries and the Euro area considered as an aggregate). The U.S. is not an outlier, with inflation and the spending surge both moderately above average.

The bottom line? Recent inflation surges were triggered by the surges in government spending – i.e., expanded government caused inflation. Learn more about how big government makes your everyday expenses more costly as Dr. Barro joins Heritage Executive Vice President Derrick Morgan.