As developing countries confront a new era of elevated inflation, rising interest rates, a stronger dollar and capital outflows, some governments stand to benefit from a little-noticed bonanza. During the "Great Moderation" that preceded the Covid-19 pandemic, years of low inflation led to the growth of sovereign debt issued at fixed interest rates and long maturities. Now, two years of unexpected inflation in the United States have effectively diluted this debt.

According to our calculations, the US government's own inflation windfall is substantial. In October 2019, the International Monetary Fund's (IMF) World Economic Outlook forecast that US inflation would be 2.4 per cent in 2021 and 2.3 per cent in 2022. But US inflation clocked in at 4.7 per cent in 2021, and the IMF now expects a rate of 7.7 per cent this year. The size of what we call the "unexpected inflation shock" over 2021-22 is thus 7.7 per cent (the sum of the actual inflation rates minus the projected rates). Under such conditions, the biggest winner will be the largest issuer of dollar debt: Uncle Sam.