These are challenging times for central banks. The post-pandemic recovery is strong, and countries are experiencing unprecedented labour and material shortages that are impacting the supply chain of products worldwide. These shortages are adding to the problem of inflation which is on the rise, and many think it is here to stay.

However, the central banks’ decision to start tapering asset purchases to fight inflation (“Fed official urges stimulus taper next month”, Report, October 13) is complicated due to the massive amount of corporate and public debt that has accumulated over the past decade — half of the corporate bonds in the developed world have a triple B rating and many developed countries are hitting historically high ratios of debt to gross domestic product.

The massive fiscal stimulus adds to the inflation conundrum in the global debt overhang. In the US alone, President Joe Biden’s recovery plan — if approved — will add about $5tn to the Federal Reserve’s $9tn balance sheet. The EU’s €1,074bn budget together with the €750bn recovery plan will amount to an unprecedented €1.8tn of funding in the coming years. To finance such a fiscal stimulus, governments will increase taxes and issue lots of new government bonds that will add to existing government debt. Government bond prices may end up falling with interest rates rising. The issue for central banks is that such an increase in interest rates alone may force them to keep or even increase their monetary stimulus in order to avoid a chain reaction of defaults.

So the threat is “stagflation”, a combination of low growth produced by the debt overhang and monetary inflation.

Jaime Luque Associate Professor of Economics, ESCP Business School, Madrid, Spain