Over the past two decades, falling interest rates have saved Washington trillions of dollars on its debt payments and brought complacency regarding the escalating federal debt. An inflation rate surging to 9.1 percent has already begun pushing interest rates upward — and these higher interest rates threaten to bury the federal budget, with damaging economic consequences.
Rising inflation does not, by itself, dramatically damage the federal budget. It produces more tax revenue (not all parts of the tax code are inflation-adjusted), and also automatically raises federal spending formulas. The Office of Management and Budget (OMB) estimates that these higher revenue and spending levels largely cancel each other out in terms of budget deficits.
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Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here.
This piece originally appeared in Peter G. Peterson Foundation