PHOTO: AFP/FILE

REUTERS, London

Countries across the Western world are over-indebted. In theory, they could grow their way out of the debt or rein in their fiscal deficits. But the richer countries have a miserable recent growth record. And as the fall of French Prime Minister François Bayrou this week shows, there’s no public appetite for austerity. The siren of inflation calls. Whether countries succumb depends on how tightly they have lashed themselves to the mast.

Anti-inflation commitments vary in strength, from weak to strong. The weakest is central bank independence. Central bankers do not usually face the sack for missing their inflation target. Keeping monetary policy tight presents a bigger career risk, as Federal Reserve Chair Jay Powell has learned. Although the US central bank is notionally independent of the executive, President Donald Trump wants easy money and has taken to publicly berating Powell’s decisions.

Trump is following a well-trodden path. Presidents Lyndon Johnson and Richard Nixon both pressured their top central bankers to ease policy. At one fractious meeting, LBJ is said to have pushed Fed Chair William McChesney Martin against a wall. Martin’s successor, Arthur Burns, failed to stand up to Nixon and unwittingly unleashed the Great Inflation of the 1970s.

Governments that issue inflation-linked bonds are making a much stronger commitment to price stability. When the United Kingdom issued its first government bonds whose principal and interest was tied to the price level in 1981 a Treasury paper opined: “Indexed borrowing imposes discipline in that it becomes less easy for a government to inflate as a way of resolving immediate difficulties ... only a government committed to a sustained reduction in inflation would wish to issue them.”

Today, nearly a third of Britain’s outstanding gilts are so-called “linkers”. The Spectator magazine frets that this mountain of indexed borrowing will cause the public finances to crash. In June, the government paid just short of 11 billion pounds in interest on index-linked bonds, equivalent to 63 percent of its debt-servicing costs. The inflation “uplift” on the nominal 423 billion pounds of outstanding linkers has added 254 billion pounds to the national debt.

Still, such fears are probably overdone. The June spike in interest costs was anomalous. Over the past couple of years, inflation-linked gilts have accounted for 30 percent of total debt-servicing costs, in line with their share of the public debt. Furthermore, most outstanding inflation-linked debt carries very low coupons. For instance, the 2073 index-linked bond was issued with a coupon of just 0.125 percent.

If inflation picks up again, the British government has several options to limit the costs. For instance, it might tweak the inflation numbers used to calculate payments. It has already taken a step in that direction.