Can we inflate away government debt in 2025?

Inflation can reduce the real value of government debt by eroding the purchasing power of money. When prices rise, the money used to repay existing debt is worth less than when it was borrowed. However, in modern economies, a large share of public borrowing is either short-term or inflation-linked, which limits how much governments can benefit from higher prices.

Inflating away debt occurs when higher inflation allows governments to repay debt in currency that has lost some of its real value. This approach was more effective in the post-war period, when inflation was elevated and most debt carried fixed interest rates. Today, it’s less viable because central banks target low and stable inflation, and an increasing proportion of public debt automatically adjusts to inflation.

Governments can address high debt levels through a mix of strategies, including supporting sustainable economic growth, containing public spending, and reforming tax systems. Sustained inflation or austerity alone is unlikely to deliver lasting results. Many economists now expect balanced fiscal reform – combining growth initiatives, selective tax measures, and responsible borrowing – to remain the most practical approach.

Unlikely in the long term. Persistent inflation raises debt servicing costs, particularly for inflation-linked bonds, and increases government spending on wages and benefits. Most central banks remain committed to price stability, making it improbable that high inflation will be used deliberately as a debt-management tool.