The season of Lent has started for me. That means we have moved into a phase of fasting on Fridays. We have come a long way from 'Fat Tuesday' where everyone could enjoy their favorite delectable (and more) just earlier this week.

It is this same sort of feast or famine that we have been witnessing in spades in fiscal policy world recently. Though the famine in the past year really has been because we are lapping more difficult comps.

The 'reduction' in fiscal spend has had a meaningful impact and drag on GDP growth. Remember the old GDP = C + I + G from your econ days and realize the change in G has been negative the past year, masking strength in other parts of the economy.

This change in fiscal spend has also been dampening inflation. You can see the change in fiscal spend and the change in CPI in the chart today. The big busts of fiscal spend lead to moves higher in CPI which then slowly fades.

The burst around Covid was epic and not before seen in this time series. Should it be a surprise that we saw a massive spike in inflation which is and will take a while to subside?

Then we have to consider what the future of this fiscal spending is goign to look like. The Budget calls for new spending initiatives focused on public health, education, housing, crime prevention and more.

Then there was the speech given in Ukraine that said our support there would be unwavering and do whatever it takes. Let's throw in the mix that both sides have said there will be no entitlement reform.

What do we think fiscal spend will look like in the coming year or two, particularly with an election next year? What impact do we think this will have in inflation? Do we think this will make the Fed's job harder or easier?

We can argue it could be good for nominal revenues for companies. However, what does this persistent inflation mean for margins?

Stay Vigilant

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