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High infla­tion has bolstered advanced eco­nom­ies.

 

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High infla­tion has bolstered advanced eco­nom­ies’ pub­lic fin­ances, the IMF said yes­ter­day, as it called on gov­ern­ments to use the wind­fall to cut defi­cits.

Research pub­lished by the fund showed the sur­prise surge in prices over the past couple of years had helped lower debt bur­dens sub­stan­tially.

Accord­ing to the IMF’s data, high infla­tion led the US net debt bur­den to fall from 99 per cent of gross domestic product in 2020 to 95 per cent in 2022, des­pite the coun­try’s large pan­demic-era budget defi­cits. «You can­not keep sur­pris­ing people,» he said, adding fiscal author­it­ies should lower budget defi­cits to help cent­ral banks bring high price rises under con­trol.

High infla­tion delivered a pub­lic fin­ances wind­fall partly because the surge in prices in 2021-22 was more than expec­ted by investors. Many lost out by lend­ing to gov­ern­ments at low rates of return rather than demand­ing higher debt costs that usu­ally accom­pany higher infla­tion.

But Mauro said the bene­fit of infla­tion to tax­pay­ers at the expense of bond­hold­ers was unlikely to be repeated.

The shock to prices owing to sup­ply chain prob­lems dur­ing the pan­demic — and a surge in food and energy costs in Europe after Rus­sia’s full-scale inva­sion of Ukraine — is now being priced into bond mar­kets. Yields on the US bench­mark 10-year gov­ern­ment bond have risen from 1.1 per cent at the start of 2021 to 3.5 per cent today, with sim­ilar rises across advanced eco­nom­ies and at all matur­it­ies of debt.

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