(Bloomberg) — Who is to blame for America’s high inflation? The people who create fiscal policy, at least those who are behind monetary policy.
US consumer prices have been more convincing than in other developed economies and one reason may be the massive government support provided to Americans during the pandemic, according to researchers at the Federal Reserve Bank of San Francisco.
“The fiscal support measures they will have to counteract the severity of the economic effect of the pandemic may have contributed to this divergence by increasing inflation by about 3 percentage points for 2021 fines,” wrote Òscar Jordà, Celeste Liu, Fernanda Nechio and Fabián Rivera. -Reyes in the weekly Economic Letter of the regional Fed.
“However, without these spending measures, the economy could have tipped into full-blown deflation and slower economic growth, the consequences of which would have been more difficult to manage,” he added.
US core CPI, which excluding food and energy prices, started 2021 below 2% y/y and ended the year above 5%. By contrast, inflation in a sample of Organization for Economic Co-operation and Development countries averaged a more gradual rise.
The Fed raised interest rates at its March meeting for the first time since 2018, beginning what is expected to be a series of hikes to stem the biggest price pressures in 40 years.
Mounting price pressures have become a huge political handicap for President Joe Biden, whose approval ratings have suffered as a result. Inflation has already been a drag on new spending measures, and the fallout could make it harder for Democrats to defend their slim majorities in Congress in November’s election.
The researchers used an index of real disposable income to tease out how much support US households received versus other OECD countries. They found two distinct peaks in the US to the CARES Act, corresponding to March 2020, at the start of covid-19; and the American Rescue Plan Act, a year later.
“Both laws resulted in an unprecedented injection of direct assistance with a relatively short duration. In contrast, real personal disposable income for our OECD sample increased only moderately during the pandemic,” he wrote. The sample appeared Canada, Denmark, Finland, France, Germany, the Netherlands, Norway, Sweden and the United Kingdom.
The researchers also noted that another analysis, using different assumptions, found a much smaller contribution to inflation from fiscal policy.
Fed study points finger at fiscal boost from high US inflation
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