The fiscal policy bet that led to more inflation

US inflation is higher than other countries in the OECD. The difference is significant and started last year before the Ukraine War. We have been running the economy hot even before the pandemic based on relative inflation. We are now seeing he results of these policies. 

Charts are from a good short research piece from the San Francisco Fed, "Why is US inflation higher than in other countries?" 

At the same time, the real disposable income has jumped to higher levels than other OECD countries. Disposable income was similar to other OECD countries before the pandemic. US fiscal policy pushed disposable income higher versus the rest of the developed world. The fiscal policy spikes are now normalizing. 

If the fiscal support was not present inflation in the US would be 3 percent lower than current levels which would put the US back in the OECD range. The US made a bet to aggressively expand fiscal policy to maintain the real economy during the pandemic. It may have been assumed that inflation would be higher given this stimulus, but since the US was just below the 2% target, the Fed and US government were willing to accept the risk. The oil and logistic supply shocks as well as the war were not fully expected. It was a policy bet and it has not worked out with respect to inflation. It should be owned, but the investment question is what will now happen.

First, monetary policy is becoming restrictive. The Fed may be moving faster than other central banks, for example, the ECB.  Second, there is no BBB bill that is pending or has been approved so the fiscal policy has become more restrictive and consistent with other countries. Hence, we should see inflation move back to OECD averages. Inflation should normalize at a level lower than current headlines. What is unclear is the timing. It is easy to argue for inflation mean reversion, yet it may not come until the end of the year and that will be at the price of lower aggregate demand.