How can economic policy respond to a sharp rise in inflation?

The United States and Europe are faced with high inflation, which began with commodity prices but may then become generalised. We examine how economic policy might respond to a sharp rise in inflation. S harp interest rate hikes with a view to rapidly driving down inflation. The risk here would be a fall in activity, problems for public finance s and the inability to increase public spending. Public transfer payments to households to offset the loss of purchasing power caused by the inflation, as wages are poorly indexed to inflation. This solution raises several problems: the cost for public finances, the fact that demand for goods and services is not curbed and therefore inflation is not combated by lower demand; it also precludes raising interest rates. Public intervention to cap energy prices . T he difficulties are then the same as those under the previous choice, in addition to the fact that it would eliminate the price signal. In stead , a restrictive fiscal policy to combat inflation, which avoids the risks associated with higher interest rates, but rules out supporting purchasing power. Altogether, the first decision is whether or not to support household purchasing power through public transfer payments. If this is done, then it becomes very difficult to combat inflation, whether through fiscal policy or monetary policy. If this support is not put in place, the decision is then whether to combat inflation either through monetary policy or fiscal policy.