THEinflation it is not the absolute evil: on the contrary, for those who are in debt it is even good news, because the increase in prices erodes the value of the debt. The same goes for the Italian state, one of the most indebted in the world: inflation brings down the real value of our non-indexed government bonds and therefore lightens the weight of public debt.
Inflation and public finances: over time, interest expenditure also rises
This mechanism, however, does not bring eternal benefits to the Treasury. Over time, while the real value of the bonds comes down, their real yield increases to reflect the advance in prices. In other words, investors demand higher nominal yields based on new inflation expectations, so the government is forced to roll over maturing bonds or issue new debt at higher interest rates.
But in the short term the debt/GDP ratio is reduced
This does not mean that, in the short term, the price rush give the State some relief on the debt side, because "the increase in interest expenditure is slight - reads in an article of the Observatory on Italian public accounts, led by Carlo Cottarelli – and does not compensate for the erosion of the real value of government bonds, ie the inflation tax: the net effect reduces the debt/GDP ratio”.
Index-linked securities account for only 10,9% of debt
We must also consider that the State does not obtain any advantage over the so-called BTP€i, government bonds that provide for the inflation-indexed revaluation of the principal and coupons. At the end of 2021, however, indexed Treasury bills were worth only 10,9% of Italy's public debt.
In 2022 a positive net effect of 35 billion is expected
Compared to the forecasts contained in the Update Note to the Economic and Financial Document published last September, "today the expected inflation rate (change in the GDP deflator) has increased by 1,8 percentage points and interest rates by 2,5 percentage points ”, continues the article. On the basis of these new data, therefore, the CPI Observatory estimates "a higher inflation tax of 43 billion", 2,3% of GDP, "against an increase in interest expenditure of around 8 billion", 0,4% of GDP, "over twelve months". As a result, analysts expect a net positive effect of around 35 billion (1,9% of GDP) on the debt-to-GDP ratio this year.
A windfall which, however, as mentioned, is not destined to last: "Over time and with the progressive renewal of securities at interest rates that fully (or even more) reflect the increase in inflation - concludes the Observatory - the net effect of the inflation tax on the debt/GDP ratio tends to wear off”.
