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Thursday, December 8, 2022

What Is The Relation Between Stimulus Checks And Inflation?

The United States remained afloat throughout the epidemic because of a $5Tn stimulus check avalanche returned to the hands of people in 2020-21. As per The New York Times, the largest portion was sent directly to homes and companies.

Alone, direct stimulus checks and advance (CTC) Child Tax Credits deposited more than $1 trillion in personal bank accounts. Through upgrades to programs such as SNAP, billions more reached them indirectly.

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Within a short time, prices rose across the whole economy, and inflation rose at its highest rate in forty years.

The relation between today’s extreme inflation with the greatest stimulus check infusion in the history of the American economy is slightly more nuanced than a simple cause-and-effect relationship would suggest.

The Stimulus Check Payments Contributed To Inflation, However, Not Entirely

Inflation is one of the most common and inevitable consequences of economic growth. As companies expand, their hiring rate rises, unemployment declines, and families have more disposable income, which raises demand for products and services and leads to rising prices.

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The pandemic’s economic impact was neither natural nor normal. Similar logic applies to today’s inflation rate of 8.3%, which, according to the Wall Street Journal, is finally going down after months of remaining at the highest in 4 decades.

In normal times of economic expansion, costs rise gradually as money enters the system. As such, it is reasonable that an unexpected flood several trillion dollars from stimulus checks would cause prices to rise rapidly.

Consequently, are these stimulus check payments the reason for the current high rate of inflation, as certain voices on this politically explosive topic would have us believe?

Undoubtedly, the stimulus checks are accountable for at least a portion of the issue, but to what extent? The most accurate estimate can be gotten from the San Francisco Federal Reserve Bank. They predicted, near March-end, that stimulus from the government may have increased the national rate of inflation by three percentage points.

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