The Central Banks article ended at the limits of monetary policy. Interest rates can suppress demand. They cannot increase the supply of oil. They cannot reopen the Strait of Hormuz. They cannot rebuild a destroyed refinery. They cannot lengthen a sea route shortened by Houthi missiles. They cannot grow wheat in a drought. The Bank of Mauritius raised its policy rate to 4.75 percent in May 2026 because the rupee was under pressure. The Governor himself confirmed the cause was the Iran war. The rate hike did not lower the oil price by a single cent. It made every Mauritian mortgage more expensive and every Mauritian business loan more costly. The price of bread did not fall. The inflation did not stop. The argument was empirical and the evidence was overwhelming.

Politicians and commentators responded with a counter-argument that has a long pedigree. If monetary policy cannot do it, fiscal policy can. Governments have tools that central banks do not. They can cut spending. They can impose price controls. They can defend the currency. They can subsidise the consumer. They can borrow externally. They can issue strategic reserves. The case for fiscal control of inflation is institutionally seductive because it locates power where elected officials sit, not in the technocratic chambers of independent central banks. It is also empirically false, in ways that the historical record makes uncomfortably clear.

This essay tests the fiscal claim by running it against four cases. Nixon's 1971 wage and price freeze, the most ambitious peacetime price control regime in the history of an industrial democracy. Venezuela's two decades of escalating price control regimes from Chávez to Maduro, the most sustained Global South experiment of its kind. Egypt's four currency devaluations between 2022 and 2024 and its IMF-conditioned fiscal consolidation, the most current real-time test of orthodox fiscal management in the face of imported inflation. And Mauritius's present attempt, through May 2026, to defend the rupee with reserves it does not have while the Iran war drives the oil bill higher every week. Each case isolates a different fiscal instrument. Each case produces the same answer. The instrument did not control the inflation. It transmitted it, distorted it, deferred it, or rebranded it. None of those four operations are the same thing as controlling it.

government spending cuts austerity supply shock anti-inflationary deflationary distinction

The classical fiscal argument runs as follows. Inflation is too much money chasing too few goods. If the central bank cannot reduce the money supply effectively, the government can reduce demand directly by cutting its own spending. Less public expenditure means less aggregate demand means lower price pressure. This is the IMF prescription in distilled form. It is taught in every undergraduate economics course. It is the reasoning behind every austerity programme imposed on a Global South country in financial distress for the last fifty years.

The argument is technically correct under one condition. It is correct when the inflation is demand-driven. When the economy is overheating, when consumer spending is racing ahead of productive capacity, when wage growth is exceeding productivity growth, cutting government spending reduces the temperature of the system. The 1980s Volcker disinflation in the United States is the canonical example. The condition for fiscal contraction to work is that the inflation must originate inside the economy being cooled.

The Iran war inflation does not originate inside Mauritius. It does not originate inside Egypt. It does not originate inside Sri Lanka or Senegal or Bangladesh or Pakistan or any of the dozens of Global South economies currently absorbing the price shock. The inflation originates in the Strait of Hormuz, in the Saudi production cuts, in the Houthi missile campaign that has reduced Suez traffic by sixty-one percent, in the global insurance market reassessing maritime risk, in the shipping companies adding hundreds of dollars per container to cover the longer Cape of Good Hope route. None of these factors respond to a Mauritian government spending cut. None respond to an Egyptian budget tightening. None respond to a Sri Lankan tax increase.

Austerity is deflationary. It is not anti-inflationary in a supply-shock environment. The distinction is the single most important concept in this entire essay. A deflationary policy reduces demand. An anti-inflationary policy in a supply-shock environment would need to increase supply. The two are not the same. Cutting domestic demand to fight a shock that originated outside the domestic economy is treating the wound by starving the patient. The inflation continues. The growth slows. The unemployment rises. The shock is now being absorbed twice. Once through the price increases on imported goods. Again through the deliberate suppression of domestic activity to prevent those price increases from spreading. The country becomes poorer in both dimensions and the underlying supply problem is unchanged.

This is what is happening in Egypt right now. Egyptian inflation rose to 34 percent by early 2024. The IMF Extended Fund Facility conditioned its $8 billion disbursement on fiscal consolidation. The Egyptian government complied. Public spending was cut. Subsidies were reduced. Fuel prices were allowed to rise. Inflation came down to around 15 percent by April 2025, which the IMF presents as a success. The cost was that the purchasing power of the Egyptian household collapsed, food prices for some items rose over 300 percent in the same period, and a substantial number of Egyptians fell below the poverty line. The inflation rate fell. The inflation experience for the average Egyptian got worse. These two facts are not contradictory. They are the same fact described from different angles. The first is the inflation that economic models measure. The second is the inflation that human beings live through.

Nixon Executive Order 11615 wage price freeze 1971 Venezuela Chávez Maduro shortages

If demand-side fiscal policy cannot fix supply-side inflation, the obvious alternative is direct intervention on prices themselves. Set the price by law. Forbid increases. Enforce the ceiling with the apparatus of the state. This is the most intuitive instrument in the entire toolkit and it has the longest historical record of failure.

On 15 August 1971, President Richard Nixon signed Executive Order 11615. The order imposed a ninety-day freeze on all prices, rents, wages and salaries across the United States economy. It was the most ambitious peacetime price control regime ever attempted by an industrial democracy. The stock market jumped four percent on the announcement. The administration's economic spokesman, Treasury Secretary John Connally, presented the move as decisive action against an inflation that had reached 6.2 percent unemployment combined with rising prices, the condition that would later be called stagflation. The political reception was, in the short run, ecstatic. Nixon won the 1972 election in a landslide.

The economic reception was different. The ninety-day Phase I became Phase II, Phase III, Phase III½ and Phase IV. The controls were extended, modified, complicated, and partially lifted across thirty-two months. Petroleum was singled out for extended regulation under the Emergency Petroleum Allocation Act of 1973, which would not be revoked until early 1981 under Ronald Reagan. The shortages that price controls predictably produced were addressed not by removing the controls but by adding rationing, supply allocation rules, and demand-suppression measures. The 1973 oil shock arrived while the controls were still in force. The 1970s stagflation, the worst sustained inflation in American postwar history, was substantially worsened by the very policy that had been advertised as its remedy.

The lesson of 1971, in Nixon's own pre-presidency words from his 1968 campaign, was already known to him. He had said publicly, before taking office, that price controls "treat symptoms and not causes" and that "experience has indicated that they do not work, can never be administered equitably, and are not compatible with a free economy." Three years later he imposed them anyway, because the political imperative of appearing to act in the face of inflation outweighed the economic knowledge of why such action would fail. This is the pattern. It is the pattern in 1971 and it is the pattern in 2026.

Venezuela ran the same experiment for two decades with more severity and a deeper collapse. Hugo Chávez imposed price controls in 2003 to cap consumer inflation, which was then 18.6 percent. The system expanded over the following years to cover an increasing range of goods, with price ceilings set substantially below the cost of production. Private producers reduced output. Some closed. Foreign currency controls fixed the exchange rate, which created a parallel black market. Imports were funded with oil revenue, which collapsed when the oil price fell from over $100 a barrel in 2014 to around $33 in early 2016. The price control regime was tightened in response. Profit caps were imposed in 2011. Inventory seizures and jail terms for retailers were used to enforce the ceilings. Production fell further. Shortages spread to food, medicine, basic hygiene products. Hyperinflation took hold, with Bloomberg estimating an annualised rate exceeding 7,000 percent by 2017. Venezuelan living standards fell by 74 percent between 2013 and 2023, the fifth-largest decline in modern economic history. The largest declines outside Venezuela occurred during the Iraq war, the Lebanese civil war, the Liberian civil war, and the collapse of the Soviet Union. Venezuela achieved its collapse during peacetime, through deliberate policy, while sitting on the world's largest proven oil reserves.

The Venezuelan case is not an anomaly. It is the logical end-point of any price control regime sustained long enough. Price controls do not eliminate inflation. They transfer it from the price column to the availability column. The shelf becomes empty before the price drops. The official statistics improve while the actual consumer experience deteriorates. The political appearance of control is purchased at the cost of the underlying economic function of prices, which is to signal scarcity and direct production towards goods in demand. Once that signal is broken, the production system breaks with it.

Egypt pound devaluation 2022 2024 IMF Mauritius rupee defence reserves imported inflation

The third instrument is the exchange rate. A weak currency makes imports expensive. A defended currency requires foreign reserves. Both transmit the supply shock to the domestic economy in different forms.

Egypt has run the most current and best-documented experiment in exchange rate management against imported inflation. The Central Bank of Egypt maintained an effectively fixed exchange rate against the dollar through most of 2022, even as global energy and food prices surged following the Russian invasion of Ukraine. The defence of the pound burned through foreign reserves. By March 2022 the position was untenable. The first devaluation occurred. Then a second in October 2022. Then a third in January 2023. Then a fourth in March 2024, when the pound was floated under the conditions of the $8 billion IMF Extended Fund Facility. The cumulative depreciation took the pound from approximately 19 to the dollar in March 2022 to approximately 47 to the dollar by April 2024.

Inflation followed exactly the pattern the theory predicts. From 7.5 percent in December 2021, Egyptian inflation rose to 21.9 percent by December 2022, to 34 percent by early 2024, with food price inflation in some categories exceeding 300 percent. The defence of the exchange rate did not prevent inflation. It deferred and concentrated it. The eventual devaluation transmitted the accumulated stress into the domestic price system in a sudden discontinuous adjustment that was politically traumatic and economically costly. By the time the IMF declared a partial success in April 2025, with inflation back below 15 percent, the Egyptian household had experienced three years of severe purchasing power erosion and the country had accumulated a debt servicing burden that diverted resources from health, education and social transfers.

The Egyptian case is not a failure of policy execution. It is a feature of the instrument. Exchange rate defence in a fixed regime works only as long as the reserves last. Exchange rate flexibility transmits the global price level to the domestic economy in real time. There is no third option that escapes both costs. A country can pay for its supply shock through devaluation and inflation. A country can pay for its supply shock through reserve depletion and eventual devaluation and inflation. A country cannot avoid paying for its supply shock through monetary or fiscal instruments alone.

This is the situation Mauritius is currently in. The Bank of Mauritius is defending the rupee with limited reserves while imported inflation runs through every sector of the economy. The May 2026 rate hike to 4.75 percent was, on the BoM's own account, a defensive move on the exchange rate. The Governor confirmed the underlying cause was the Iran war. The IEA confirmed Brent above $110 per barrel and the energy market in red zone territory by end of June. Suez transit revenues across the Red Sea route are down sixty-one percent. The Mauritian fuel import bill has risen sharply through the second quarter. The trade deficit for 2025 reached Rs 211 billion. The current account position cannot sustain a defended rupee for an extended supply shock. Either the rupee depreciates and the inflation accelerates through imported price increases, or the reserves run down and the eventual depreciation arrives later but larger. There is no third path. There is only a choice of timing.

inflation political narrative central bank blame absorption global factors government responsibility

If none of the fiscal instruments can fix supply-side inflation, the question becomes why governments persist in claiming that they can. The answer is that the claim is not really about economics. It is about politics.

A government that admitted publicly that it could not control inflation in a supply-shock environment would be admitting that it could not protect the citizen from the most visceral economic experience of daily life. The price of bread. The price of fuel. The price of cooking oil. The price of school transport. The price of medication. These are the things a citizen feels every week and judges a government on every week. To admit that the government has no instrument that can fix them is to admit a fundamental limit on the legitimacy of the state in the modern economy.

The narrative of inflation controllability is therefore a political necessity regardless of its economic accuracy. The government must claim it can do something. The opposition must claim the government is failing to do the something. The media must report the back-and-forth as if the underlying question were real. The central bank must offer a tool. The Finance Ministry must offer another tool. Both tools fail to do what they are advertised to do. The failure is reframed as insufficient implementation, insufficient resolve, insufficient cooperation between institutions. The next round of policy is announced. The shock continues. The household pays. The narrative survives because no political actor benefits from puncturing it.

This is the deeper function the central bank performs in the political economy of modern inflation. It absorbs the blame. When prices rise, the government points to global factors and to the technical inadequacy of monetary policy. When the central bank raises rates and growth slows, the government points to the central bank as the proximate cause of the slowdown. The institution becomes a blame-absorption mechanism, an institutional buffer that protects the elected government from the political consequences of an inflation it never had the tools to control. The central bank cannot say so publicly because doing so would destroy the legitimacy on which monetary credibility depends. The government will not say so because the entire fiction of fiscal-monetary coordination depends on both sides pretending the levers exist.

The Bank of Mauritius spent the first quarter of 2026 doing exactly this work. The rate hike to 4.75 percent was defended as a measure to control inflation. The Governor's own statements identified the Iran war as the underlying cause. The Forum Sitwayin response argued the cause was overconsumption, fiscal looseness, monetary expansion. The two narratives are incompatible. The Governor's narrative is empirically supported by the IEA, the IMF and the global energy market data. The Forum Sitwayin narrative is politically convenient because it locates the cause inside Mauritian policy choices, where Mauritian institutions could in principle respond. The fact that the two cannot both be true is, in the structure of the narrative, irrelevant. Each serves a different audience. Each performs a different political function. The economic question of whether either narrative is correct is, in the public conversation, almost incidental.

Global South dollar denomination imported inflation currency depreciation Washington decisions credibility constraints

Governments in the Global South face every constraint described above and three more besides. Their trade is denominated in dollars they do not issue. Their imports are priced in dollars they must earn through exports. Their interest rates are constrained, not in theory but in practice, by interest rate decisions made in Washington and Frankfurt. Their credibility in international capital markets is fragile, expensive to acquire, and easy to lose. Their reserves are small relative to their import requirements. They have fewer tools, less credibility, and more exposure than the advanced economies whose textbooks they are taught from.

The implication is severe. The narrative of inflation control is most dishonest precisely where the capacity to control inflation is lowest. A wealthy advanced economy can plausibly tell its citizens that the inflation will subside, the central bank has the tools, the fiscal authority has the buffer, the institutions are credible. A Global South economy that tells its citizens the same thing is performing a political ritual whose economic content is close to zero. The instruments are not equivalent. The exposures are not symmetric. The buffers are not comparable. To pretend otherwise is to operate a political theatre in which the script and the stage are borrowed from a different country running a different economy.

Mauritius runs this theatre as well as any country in the region. The institutional language is Westminster. The technocratic vocabulary is borrowed from the IMF Article IV reports. The narrative of policy mix, fiscal consolidation, monetary tightening and structural reform is delivered with the cadence of an economy that has the tools the words imply. The instruments themselves are smaller, weaker and more exposed than the words suggest. The trade deficit of Rs 211 billion in 2025 was not a footnote. It is the central fact of the political economy. The reserve cover for imports is not abundant. The pension system was built for a different demographic profile. The energy import dependence is total. The food import dependence is near-total. The political class talks as if these were management problems. They are not. They are structural conditions. The fiscal toolkit cannot fix them. The monetary toolkit cannot fix them. The narrative of control cannot fix them. The Iran war did not create them. It exposed them.

structural vulnerability supply shock economic sovereignty Global South fiscal monetary truth

The honest answer to the question this essay asks is that governments can do some things in the face of supply-shock inflation, and they cannot do other things. They can target relief at the most vulnerable households. They can build strategic reserves of fuel and grain when prices are low so that domestic prices do not have to absorb the full shock when prices are high. They can diversify trade routes and supplier countries so that a single chokepoint does not transmit a single shock to the entire economy. They can invest in domestic energy generation so that imported energy is a smaller fraction of total energy. They can negotiate long-term contracts that hedge price exposure. They can run sovereign wealth funds counter-cyclically.

These instruments work. They are not glamorous. They are slow. They require political horizons that exceed an electoral cycle. They require admitting publicly that the country has structural vulnerabilities that cannot be papered over with rate decisions and exchange rate management. They require accepting that the role of government in inflation control is not to fix inflation, which it cannot do, but to reduce the exposure of the citizen to inflation that originates elsewhere. The first formulation is heroic and impossible. The second formulation is technical and feasible.

Mauritius has not built any of those instruments at scale. There is no strategic petroleum reserve. There is no food security buffer. The trade portfolio is not diversified. The domestic energy mix is still dominated by imported fuel. There is no sovereign wealth fund. There is no long-term hedging programme. There are speeches about all of these things. There are no functioning institutions delivering them. When the Iran war drives the oil price higher, the country has no shock absorber. When the global food market tightens, the country has no stock. When the rupee comes under pressure, the country has no buffer. The structural vulnerability is the inheritance of fifty years of import-aid-extract economics, of pension promises designed for a younger country, of an exchange rate model that worked when commodity cycles were gentle, of a financial sector designed to attract capital flows rather than to absorb capital shocks.

The question this essay asks is whether governments can control inflation. The answer is that they can reduce their exposure to it and they can protect their citizens from the worst of it. They cannot control it. The fiscal instruments are not magic. The monetary instruments are not magic. The narrative that one or the other is magic is a political necessity that has now outlived its usefulness. The Iran war has called the bluff. The instruments do not work as advertised. The exposures are real. The shock is unfinished. The honest conversation has not yet begun.

It needs to begin. The first country in the Global South that admits publicly what every Finance Minister already knows privately, that the toolkit cannot fix the shock and the only honest response is structural protection of the household and structural reduction of the exposure, will be the first country to start governing on the basis of what is true rather than what is politically convenient. That is not a small thing. It is the precondition for every other reform.

It begins with telling the citizen the truth about what the government can and cannot do.