NEW YORK–Credit union economists have been as challenged in their recent forecasts as economists everywhere in attempting to read the tea leaves when it comes to the direction of inflation in 2025, which has a direct bearing on how the Fed sets rates.

Now a new analysis suggests that high government debt is an overlooked factor in driving inflation.

New research by Ernie Tedeschi, the director of economics at the Budget Lab at Yale and a chief economist at the White House Council of Economic Advisers under the Biden administration, has found  the linkage between government indebtedness and higher inflation, according to the New York Times.

Upward Costs

“When you deficit finance policies, that is going to put upward cost pressure on American households,” Tedeschi told the Times, which reminded that deficit financing involves using borrowed money to pay for government spending, like tax cuts and other policies.

“As the recent pandemic era showed, the generous fiscal stimulus programs spearheaded by the Trump and Biden administrations stoked demand when supply chains were severely constrained, ultimately heating up inflation,” the Times reported. “The Federal Reserve was then forced to take aggressive action by raising interest rates, further increasing the costs borne by households.”

According to the report, Tedeschi is estimating that a sharp rise in the deficit of around 1% of gross domestic product — “roughly the same cost of extending the tax cuts Republicans are eyeing before they expire this year — would lower the purchasing power of American households as much as $1,250 on average after five years.”

The Long-Term Costs to Households

“If the Fed responded to rising price pressures by increasing interest rates, that would most likely feed through to not only higher mortgage payments but also those related to automobile loans and those for small businesses,” the report adding, noting Tedeschi’s research found mortgage payments alone could rise as much as $1,240 per year,

After 30 years, the analysis added, cumulative loss per household from price pressures could reach $16,000. Household wealth, once adjusted for inflation and with higher mortgage costs factored in, could decline as much as $36,000 on average.