Inflation helps with the burden of global debt

High inflation rates are not bad news for everyone. They can be useful to debtors, which in today’s world economy means almost everyone.

In the second quarter of this year, indicators of household and corporate debt as a percentage of economic output reflected some of the steepest falls in several advanced economies, according to data released last week by the Bank for International Settlements (BIS) .

It is not because consumers and companies are borrowing less in dollars, euros or pounds, which is what happened in the prolonged recession after the 2008 crisis.

In fact, there are more loans. It’s just that the combination of rapid post-quarantine growth and accelerating inflation meant that its liabilities shrunk compared to the overall size of the economy measured in those same currencies.

Drops in a quarter or two don’t affect much of the overall debt burden that soared earlier in the pandemic, as central banks extended credit safety nets to businesses while mortgage lending took off amid the housing boom.

Almost all types of debt are still larger as a proportion of the economy relative to early 2020, and well above historical patterns.

The wave of corporate loans from the United States, in particular, raised red flags. While companies generally post big pandemic profits, the aggregate numbers don’t tell the whole story: Debt-distressed companies may not be the ones making money.

Higher interest rates – the next antidote to inflation – will make it harder to service debt.

Still, the data highlights that rising prices may have some beneficial side effects, which is one reason central banks spent the decade before COVID-19 trying to drive higher inflation rates, even if they are now spinning in the opposite direction, after a larger than expected spike.

The BIS figures also show a drop in public debt ratios against GDP in the most recent quarter. This has been the type of debt that has grown the most in the pandemic, as it has since the 2008 crisis.

Public debt may be less of a concern, because in the developed world it has generally been shown to be less explosive than private debt.