California Stimulus Check To Provide Relief For Increase In Fuel Prices: But Will It Fuel Inflation Instead?

Stimulus Checks

While states continue to send out Stimulus Checks, some experts warn that it could contribute to rising prices.

Over 20 states have sent or are in the process of sending money to help people cope with inflation. Some economists have warned the payments will do little to alleviate the pain of rising costs and will cause further trouble in the future.

In California alone, around 23 million qualifying taxpayers are expected to receive up to $1,050 while smaller payments will go to higher earners. The payments have been technically termed tax refunds. The first round started going out starting October 7. They are meant to help address rising costs according to Democratic Governor Gavin Newsom.

Taxpayers in Georgia received up to $500 in a one-off tax refund over the summer. Governor Brian Kemp said that hardworking Georgians face rising inflation caused by failed federal government policies. He said that the government was doing its best to provide relief by giving back some of the money to residents.

In states such as Colorado, the law stipulates that the states are to return excess state revenues to taxpayers. Rebates that were given out include $750 for individual income tax filers and double that for married couples filing jointly.

The program has been labeled as a Cash Back. Governor Jared Polis said that the state has brought forward the refund payments by around one year as residents desperately need the money immediately.

Despite Stimulus Check Relief, Economists Warn That It Will Only Lead To More Woes

As families continue to struggle to cover everyday costs and pay for the high cost of gasoline, getting some extra cash from the government is sure to provide a lot of relief, even if temporarily.

But a section of economists has argued that putting more money into the economy can drive up demand and prices for everyone.

Handing out more stimulus checks in an inflationary situation can only make matters worse as it will drive up prices up further. The Federal Reserve inflation measure revealed that prices keep rising and they went up 6.2% in August alone. The Fed is tasked with bringing down the inflation rate, and the only thing it can do is raise interest rates.

But raising rates higher can unfortunately create more economic for Americans and make it more expensive to borrow money. There is the danger that the economy can sink into another deep recession. The central bank raised its benchmark rate by three-quarters of a percentage point for the third time in a row earlier this month.

There have been fresh concerns after the federal stimulus checks, especially the third stimulus checks, were blamed for the spike in inflation. The issue has helped the Republicans gain an upper hand in Congress and became the sole issue for the opposition campaign.

The California Middle-Class Tax Rebate has stoked fears that it could lead to another round of payments in California. It is one of the biggest programs and could contribute to price rise not just in California, but could influence the price of goods and utilities across the nation.

Harvard professional Jason Furman tweeted that the inflation relief payments would end up exporting inflation to the rest of the US, and some would show up in California.

But politicians continue to be eager to promote the payments as a helpful benefit to taxpayers in an election year. the midterms are crucial for Biden as he is in danger of losing control over both the House and the Senate to the Republicans after November.

Senior research associate Lucy Dadayan with the Urban Brookings Tax Policy Center says that the stimulus checks have become more of a tool to drive political agenda. She fears that the stimulus check will lead to further inflation.

She also warns that it could affect state budgets and leave them in a precarious situation in 2023. She says that many of the states are already facing a slowdown in tax revenue growth. She warns that at this rate we could end up facing deficits in the state budgets this fiscal year.

State Stimulus Checks Need Not Be Particularly Inflationary, Say Some Experts

Even as states send out billions to individuals and households in one form or another, many experts dismiss fears that it could fuel another round of inflation. They say that states do not print money and merely shuffle it around. So it would not majorly affect the inflation rate. they say that the state stimulus checks merely amount to a rounding error in the overall inflation picture.

They maintain that all good deeds are always subject to stringent criticism from some quarters. Recent reports from some quarters have linked inflation to state-level tax rebates and other payments sent to individuals and families.

Since the outbreak of the pandemic, at least 20 states have given out stimulus checks to citizens or are in the process of sending them. The payments have been billed as an economic stimulus or as relief from rising food and energy costs. California has termed it as a Middle-Class Tax Rebate.

While critics continue to maintain that it is inflationary, they are wrong on two counts. One is a simple and logical analysis of the facts in question and the other comes from a better understanding of what leads to inflation.

Inflation is caused by three basic causes and is an increase in the general price level, not merely the price of a single service or good. Inflation can be linked to an excess of the money supply without economic growth, termed monetary inflation.

Inflation can also happen when the combined demand for goods and services exceeds the supply. This is termed either demand-pull or cost-push inflation. Too much money ends up chasing too few goods to meet demand without increasing prices.

Clubbing them together, as states do not print money, the first point of monetary inflation does apply to the move by states to send stimulus checks.

The supply chain issue is about the cost-push dimension of inflation and that has no link to payout by states. Finally, it is only the demand-pull inflation that could impact state disbursement. The rest is all ideological and political posturing.