I mention this only because some of the commentary claims not so much that QE is potentially fuelling too much inflation, and helping governments that way, but that it’s doing so by artificially depressing the cost of new debt issuance in a manner that does not (somehow) have any impact on inflation. 9  Broadbent (2014). Note that, while the impact of QE is arguably detectable in Chart 7 – the launch in 2009, for example, in the UK and the US, and again this year – it’s not as if bond yields are (or were) otherwise static. They moved around just as much beforehand, generally downwards over this period and especially so during global downturns. They might reasonably have been expected to do so in response to the pandemic, even without QE. Nor are these changes well correlated with fiscal news. As I said earlier, a model of bond yields that has them responding only to government debt and/or QE performs poorly in the data. For more on what’s depressed long-term “neutral” interest rates, see for example, Vlieghe (2018), Broadbent (2014) and the August 2018 Inflation Report. 10 If the perceived risk were that the authorities would try to “inflate away” the debt, it would be priced into conventional bonds alone (and therefore into the “breakeven” spread between the yields on conventional and indexed debt); if people worried about formal default yields on both would be affected.
Going the other way, very rapid inflations have been bad for real output growth and they’ve also tended to push up the real cost of public-sector debt thereafter, via a higher risk premium. For those reasons, and even from the narrow perspective of the government finances alone, I think these  11  Giovannini and de Melo (1993). 11  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  11  simulations should be seen as relatively optimistic, at least over the longer term. But they do at least give us some sort of handle on the marginal effects of higher inflation. As a starting point, we should begin by recognising that if the extra inflation is fully anticipated it will have very little impact on the public finances. That’s because investing institutions, which care about real returns, could then take account of it in the price they’re prepared to pay for the debt. If everyone knew in advance that inflation was about to rise permanently by (say) 1% point you’d expect nominal yields to be 1% point higher, across the curve, than they otherwise would’ve been. In real terms, the government wouldn’t pay any less for its debt – the newly sold debt, at least – even after the inflation arrives. The real value of the principle declines by an extra one per cent a year. But the interest payments – the coupons – are also a percentage point higher.