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U.S. fiscal stimulus was a key driver in boosting inflation by 3 percentage points and taking it well above rates in other industrialized nations, San Francisco Fed economists wrote in a paper published Monday, an estimate at the high end of other recent research.
Americans saw disposable income rise about 15% through the two major pandemic relief plans Congress passed in 2020 and 2021, while it was little changed across a sample of OECD countries, according to the paper. U.S. core inflation doubled to more than 4% during this period while in the peer group the increase was to 2.5% from 1%.
"These differences in inflation readings cannot be explained by measurement issues," according to the paper by staff economists Oscar Jorda, Celeste Liu, Fernanda Nechio, and Fabian Rivera-Reyes. The three-point gap was calculated over the fourth quarter of last year.
Fed Chair Jerome Powell has suggested the FOMC may hike rates half a percentage point to keep inflation expectations under wraps as Russia's invasion of Ukraine sent crude oil prices surging. The paper's findings didn't predict what will happen as fiscal stimulus unwinds, but does suggest that its implementation accounted for most of the quickening of inflation that reached 7.9% in February versus 2.5% just before the Covid pandemic.
"Without these spending measures, the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage," according to the paper.
Source: San Francisco Federal Reserve
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.