Is a fiscal deficit inflationary?

A common argument today is that the large fiscal deficit that the Biden administration will run in the United States will lead to reflation on the back of an upturn in inflation. Indeed, the Democrats ’ win in the Senate did lead expected inflation and long-term interest rates to rise slightly. But is a fiscal deficit inflationary? For this to be the case, it would have to lead to: A situation of excess demand (savings shortfall) that is not easily able to be offset by an external deficit; Or labour market overheating with a very low unemployment rate and high employment and participation rates. We do not believe that either of these two configurations is present in the United States today.