Fed Study Points Finger at Fiscal Boost for High U.S. Inflation

• San Francisco Fed researchers say it could have added 300 bps
• U.S. may have seen outright deflation without aid, study says

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Federal Reserve Leaders on Policy, Rate Hikes, Soft LandingBy

Alister Bull

March 28, 2022, 1:00 PM EDTListen to this article2:30Follow the authors@alisterbull1+ Get alerts forAlister BullIn this articleBSFOBANK OF SAN FRAN24.25USD+0.00+0.00%

Who's to blame for high U.S. inflation? The folks who create fiscal policy -- at least says those behind monetary policy.

U.S. consumer prices have surged more 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.

"Fiscal support measures designed to counteract the severity of the pandemic's economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021," wrote scar Jord, Celeste Liu, Fernanda Nechio and Fabin Rivera-Reyes in the regional Fed's weekly Economic Letter.

"However, 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," they added.

Read more: Biden Budget Predicts Inflation Slowdown It Knows Won't Happen

Getting Hotter

U.S. inflation accelerated to a 40-year high of 7.9% in February

Source: Bureau of Labor Statistics

U.S. core CPI -- which strips out energy and food prices -- started 2021 below 2% on an annual basis and ended the year above 5%. In contrast, inflation in a sample of Organization for Economic Cooperation and Development countries averaged a more gradual rise.

The Fed raised interest rates at its meeting in March for the first time since 2018, commencing what's expected to be a series of hikes to curb the hottest price pressures in 40 years.

Surging price pressures have become a major political handicap for President Joe Biden, whose approval ratings have suffered as a result. Inflation has already been a roadblock to passing further spending measures, and the fallout could make it more difficult for Democrats to defend their razor-thin congressional majorities in November's elections.

The researchers used an index of real disposable income to untangle how much support was received by U.S. households versus other OECD countries. They found two distinct peaks in the U.S. corresponding to the CARES Act, signed into law in March 2020 at the onset of Covid-19, and the American Rescue Plan Act a year later.

"Both Acts resulted in an unprecedented injection of direct assistance with a relatively short duration. In contrast, real disposable personal income for our OECD sample increased only moderately during the pandemic," they wrote. The sample included Canada, Denmark, Finland, France, Germany, Netherlands, Norway, Sweden and the U.K.

The researchers also noted that other analysis, using different assumptions, had found a much smaller contribution to inflation from fiscal policy.

Please summarize so I have for my notes. Please explain fiscal policy and how it may have a role in inflation being so high and how it could lead to a recession or is there any way fiscal policy could actually lower inflation somehow?