Yesterday we got US inflation data, but also the US government's spending/deficit for February. Historically, US government spending (as a % of nominal GDP) correlates strongly with inflation (especially if spending spikes for any legitimate reason, be it crisis, war, pandemic, etc.). The problem is when the justified reason no longer exists and expenses do not want to return to the levels before this reason appeared (this is also the situation today).
Core inflation turned out to be slightly above expectations and we had an appropriate reaction on rates/bond market, where yields increased by approximately 6 bps (to 4.15-4.16% in the case of 10y UST).
On the side of US spending and deficit, not much changed in February. While nominal spending/deficit is generally growing like a weed, nominal GDP has also been growing significantly recently. As a result, spending and deficit as a % of GDP changed little in February 2024.
For the calculations, I assumed that nominal US GDP will grow by 1.05% in Q1 (based on the real GDP growth according to the Atlanta FED GDP tracker of 0.63% Q/Q and assuming that GDP implicit price deflator will be the same as in Q4 2023 (+0.42% Q/Q).
Feb-2024 Total Federal Outlays was $567.4 billion (+8.2% YoY), as a % of GDP it's 24.11% (Feb-2023 as a % of GDP was 23.48%).
Feb-2024 Federal Deficit was $296.3 billion (12.9% YoY), as a % of GDP it's 12.59% (Feb-2023 as a % of GDP was 11.74%).
On the 12-month rolling basis:
Feb-2024 Total Federal Outlays $6.36 trillion (-1.33% YoY), as a % of GDP it’s 22.53%.
Feb-2024 Federal Deficit $1.80 trillion (+11.0% YoY), as a % of GDP it’s 6.38%.
Figure 1 shows the US federal deficit as a % of GDP, interestingly the rules changed in 2016 when the deficit began to grow during the economic expansion.
Figure 2 shows US federal outlays and receipts as a percentage of GDP, here from September 2023 it is more or less stable and there is no increase...
Figure 3 shows US federal outlays against the inflation Y/Y rate. Conclusions: (1) do not count on a decline in spending this year to pre-pandemic levels (yet, as can be seen in Figure 2, receipts are already at pre-pandemic levels), (2) as a result do not count on inflation decline from today’s 3% Y/Y to 2% Y/Y, ceteris paribus.
Bonus chart: Figure 4 – Shelter (and rent) Inflation Series Y/Y vs Home Price Index Y/Y (16-month lead).
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