Jones’s concern about inflation resulting from high deficits overlooks the complex interplay of fiscal and monetary policy and structural economic factors. Inflation can indeed rise if government spending outpaces the economy’s productive capacity. However, recent inflationary pressures in the U.S. were driven largely by supply chain disruptions, energy shocks, and pandemic-related spending rather than chronic deficits.
To understand inflation shock, we can remodel our economic composite above to represent the drivers of inflation. Wage growth provides consumers with more money to spend. As consumers spend more money, economic demand increases, increasing prices. As economic demand strengthens, borrowing costs increase to reflect stronger demand for loans, passed on through higher prices. Therefore, unsurprisingly, inflation has an 85% correlation to economic growth, rising wages, and higher rates.