Deep Knowledge Investing: Counter-Intuitive Inflation – How Overspending Creates Inflation
Investors have focused on the Federal Reserve and its interest rate hikes over the past 18 months. Higher interest rates can cut inflation, but often at the cost of the economy. We have seen a slowdown in inflation, but an uptick in unemployment.
However, the central bank doesn’t operate in a vacuum. Other factors are at play which could create and keep inflation running higher for longer. That includes fiscal policy, the Washington term for government spending.
In 2023, the U.S. government is running a $2 trillion deficit. That’s the largest in peacetime on a percentage basis. And it’s also helped push the national debt to $33 trillion.
That $2 trillion in government deficit spending spreads throughout the economy. That can help push the costs of goods and services higher. In other words, it can help fuel inflation.
That overspending trend should slow down in the months ahead. Nearly one-third of U.S. debt will roll over in the next two years. And rather than rolling over near zero percent, it will roll over closer to today’s 5 percent interest rates.
Government spending on interest on the debt alone has now topped military spending. And it’s on track to top $1 trillion this year.
When this government overspending comes down, so will one of the biggest remaining inflation factors today.