Pandemic Fiscal Support Boosted Inflation, Fed Study Finds

2022.07.15 22:22

Budrigannews.com – Fiscal support enacted in many countries to support households during the Covid-19 pandemic helped to boost spending without increasing production, widening the mismatch between supply and demand and worsening inflation in some countries including the US, according to Federal Reserve research released on Friday.

Spending and production both dropped off at the start of the pandemic as businesses closed and health restrictions required consumers to stay home. But fiscal aid enabled people to spend more on goods before there was a rebound in production, the researchers said.

“Our findings suggest that fiscal stimulus boosted the consumption of goods without any noticeable impact on production, increasing excess demand pressures in good markets,” the researchers wrote in the note. “As a result, fiscal support contributed to price tensions.”

The US economy was impacted the most by these dynamics, with consumption dropping less during pandemic-related shutdowns and rebounding more quickly as mobility began to increase, according to the analysis. Fiscal stimulus may have increased inflation by about 2.5 percentage points in the US and about 0.5 percentage points in the United Kingdom, the researchers estimate.

One caveat to consider is that countries issuing stronger fiscal support may have been hit harder by the pandemic and experienced stronger recoveries. That makes it possible the severity of the pandemic might have made a bigger contribution to inflation than the fiscal aid in those countries, the researchers said.

“The large spending supported a strong economic rebound, with both GDP and employment recovering at a remarkable pace, likely preventing worse outcomes despite the price pressures that may have resulted from the spending,” the researchers said.