Monetary policy fights inflation mostly through two channels: first, by reducing aggregate demand, and second, by anchoring the expectation of future inflation to its target. At times like this – when inflation is already far too high– expansive fiscal policy risks undermining both of these mechanisms.
Primarily by increasing aggregate demand, but also by signalling that the government is counteracting the effects of policies aimed at reducing inflation, potentially increasing inflation expectations. This is why I and others have previously called for cost of living supports to be targeted – i.e.