Fiscal Inflation occurs when there is excess government spending. This occurs when there is a deficit budget. For instance, Fiscal inflation originated in the US in 1960s at the time President Lydon Baines Johnson. America is also facing fiscal type of inflation under the presidentship of George W. Bush due to excess spending in the defense sector.

when we define inflation - we think of rising prices instead of the actual causes of inflation. This is reasonable, since the ultimate outcome of inflation is always a general and sustained increase in price levels. It is thus easy to define inflation in terms of its ultimate results - the price increases that it causes - and ignore the underlying causes of inflation - the underlying forces that caused those results.

Fiscal inflation is due to excess government spending, for which the budget deficit is a reasonably good proxy. It originated in the "guns and butter" spending of President Lyndon Baines Johnson in the 1960s, and similar spending of today’s President George W. Bush. We have war spending without a "war economy" e.g. rationing or wage and price controls, and if the 1960s are any guide, we will be paying the price later this decade and in the 2010s.

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Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. The two main instruments of fiscal policy are government expenditure and taxation.

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If the stimulus has not been as effective as President Obama hoped, it may be because too many people believed him when he said he had a plan to deal with the debt overhang the stimulus would create. Only if they hadn't believed him would the stimulus have worked. By that reasoning, because Mr. Obama's credibility is lower this year than last, the second stimulus package currently being debated might work better than the first. No doubt Professor Cochrane would add that "work" in the previous sentence has to be defined carefully. A stimulus package that actually did "work" would be accompanied by all sorts of collateral damage to the U.S. and world economies, possibly including inflation.

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Inflation refers to 'a sustained upward trend in the level of prices', its most common measure being the percentage rate of change in a country's Consumer Prices Index. This is, however, regarded by some as a monetary definition, a better way to understand inflation being to focus on aggregate demand overstepping aggregate supply at full capacity. Yet what is visible to the eye remains the same: prices rise and continue rising.

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