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Do Higher Deficits Cause Inflation? Not This Year
Connection between inflation and spending (fiscal stuff) by the government is misunderstood or misstated, say Wharton Prof. Smetters. Doug Holtz-Eakin former CBO budget director agrees. Does higher growth mean higher inflation? It depends. The climate change action renewable energy subsidies are expected to increase growth by 0.2%, yet this should reduce fossil fuel costs, mitigating effect on inflation of government spending. Will higher deficits increase inflation? Again it depends. In 2021 direct financial help for households during the pandemic led to a third of the higher inflation in 2021, 2022 and first half of 2023. Inflation peaked at 9.1%. In 2023 the deficit is up significantly but it is mostly of the accounting kind with lower tax revenues by $278 billion from capital gains taxes due to a stock market slump in 2022, and higher interest costs of $136 billion.
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