Public debt and household inflation expectations

BIS Working Papers  |  No 1082  | 
13 March 2023



Inflation has increased sharply against the background of record-high levels of public debt during the post-pandemic economic recovery. In this paper, we ask whether high public debt might be helping to increase household inflation expectations.


To tackle this question, we design household surveys that incorporate an information provision experiment to isolate the causal effect of public debt on inflation expectations. Specifically, we inform a group of survey participants about the level of public debt and examine if this prompts people to revise their inflation expectations. We compare the results with a control group of survey participants that do not receive such information. The surveys were conducted in three countries – Brazil, the United Kingdom and the United States – letting us assess whether the results are robust across different economic and institutional environments.


We find that people considerably underestimate public debt levels and respond by increasing their inflation expectations when informed about the correct debt levels. The strength of this effect hinges on the credibility of the central bank. Inflation expectations are much less responsive to debt levels among people that have greater confidence in the central bank's determination to contain inflation or better knowledge about its inflation target. We also find that people interpret high public debt levels as bad news for the economic outlook, leading them to expect both higher inflation and higher unemployment. Finally, we document that women and low-income people tend to increase their inflation expectations more strongly when informed about high public debt levels, partly because they tend to have less confidence in the central bank.


We use randomized controlled trials in the US, UK, and Brazil to examine the causal effect of public debt on household inflation expectations. We find that people underestimate public debt levels and increase inflation expectations when informed about the correct levels. The extent of the revisions is proportional to the size of the information surprise. Confidence in the central bank considerably reduces the sensitivity of inflation expectations to public debt. We also show that people associate high public debt with stagflationary effects and that the sensitivity of inflation expectations to public debt is considerably higher for women and low-income individuals.

JEL Classification: E31, E52, E58

Keywords: public debt, inflation expectations, monetary finance, fiscal dominance