The spread between the Treasury bond and the TIPS of the same maturity is the bond market’s prediction of inflation. At no time in the next 30 years does the bond market predict an inflation rate of 2% or less.
These are actual yields as of today from Fidelity’s secondary market.
The data show that some countries — usually less developed nations — with high inflation also have large budget deficits. Developed countries, however, show little evidence of a tie between deficit spending and inflation.
I am looking at the long-term bond yields, not inflation.
I’m not saying that high federal deficits will necessarily cause inflation.
I’m saying that giant federal deficits will need massive Treasury bond issuance. Like every other commodity, bond prices respond to supply and demand. As the Treasury offers more and more bonds to the market (increasing supply) the demand from bond buyers (lenders) may not increase proportionally. This would cause bond prices to decline and therefore bond yields to rise.
Deficit spending creates the demand. As the money is spent, it winds up in banks. Banks then buy treasury bonds because is it the safest, highest return they can get.
The article you linked is more than 20+ years old. The effects of deficits on inflation may not have been as pronounced when deficits were much smaller.
This is what deficit spending has looked like from 2005 (when the linked article was written) until 2025 -
Digging into your linked article - It’s not deficit spending alone that drives inflation, but seigniorage (money creation) used to finance debt. The author of your linked article mentions -
“For the U.S. economy, there is little evidence of a link between fiscal deficits and inflation, precisely because monetary policymakers have been free to pursue goals such as low and stable inflation. They are able to do this because fiscal policy is seen as sustainable, in the sense that deficit spending today is not expected to continue to the extent that monetary policy will have to provide major funding for the Treasury. This is largely the case for the developed countries of the world. Developing countries, however, often require revenue from seigniorage to meet their fiscal financing needs. Thus, these countries tend to show a strong link between fiscal deficits and subsequent inflation.”
I agree, but there’s something missing. There’s not an infinite amount of money available in the economy. Money is needed to purchase bonds. When there’s not enough $$$$$, the Fed’s QE increases money supply. Like my man Biggie Smalls used to say…mo’ money, mo’ problems.
Here is the definition of seigniorage:
Seigniorage is the profit or revenue a government or central bank earns by issuing currency, calculated as the difference between the face value of money (coins/notes) and its production costs. It represents a form of income generated from money creation, often acting as a hidden tax, as production costs are usually minimal compared to purchasing power. [end quote]
Our government recently stopped minting pennies because even the cheap copper-plated zinc pennies cost more to mint than their current purchasing value. Currency debasement has been used many times and is a sure sign of inflation and a declining empire. When I was a child, dimes and quarters were silver. I could buy a slice of pizza for 15 cents with a quarter and get a dime back in change. As of April 2026, the 90% silver content in a standard dime is worth approximately $5.49. Now, that’s inflation.
QE – creation of fiat money by the Federal Reserve – costs nothing so the seigniorage is infinite. Here’s the incredible mountain of fiat money the Fed created. For comparison, U.S. GDP is about $31.4 trillion so this fiat money is about 1/5 of GDP.
The Fed’s money creation is monetary stimulus. It’s less inflationary than fiscal stimulus which comes from Congress (government spending) and goes into consumer pockets where it creates demand. The federal deficit is currently 5.8% of GDP and the debt is 122% of GDP.
The market determines price by supply and demand. Pumping money into people’s pockets without increasing the supply of goods and services proportionally causes consumer price inflation.
