In an article for the Federal Reserve, Veronique de Rugy warns against premature victory laps over inflation, citing the misunderstanding of the role of fiscal policy in its rise. De Rugy explains that unprecedented government spending and debt, combined with the lack of a plan to offset these expenditures, have contributed to the current inflationary pressures. Without addressing these underlying fiscal issues, De Rugy cautions that inflation may continue to rise, causing trouble for the new administration.
De Rugy emphasizes the importance of considering both monetary and fiscal policy when addressing inflation, noting that recent inflation reflects the market’s adjustment to unsustainable fiscal policy. She warns of a dangerous feedback loop, where higher inflation leads to higher interest rates and debt-service costs, potentially fueling further inflation.
In order to control inflation, de Rugy calls for fiscal discipline, including curbing federal spending and ensuring stable tax revenues. She stresses the importance of rejecting new spending and focusing on growth through improved tax systems and deregulation. Failure to address these fiscal-monetary interactions could lead to a crisis with significant consequences.
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