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Monday, August 8, 2022

Did Stimulus Checks Cause Inflation?

America stayed afloat during the pandemic thanks to a $5 trillion avalanche of stimulus check money transferred from the government back to the people during 2020-21. The biggest share, according to The New York Times, was paid directly to households and businesses.

More than $1 trillion made its way into personal bank accounts through direct stimulus payments and advance Child Tax Credits alone. Trillions more reached them indirectly through enhancements to programs like SNAP.

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Prices soon began increasing across the entire economy, and not long after, inflation was rising at its fastest rate in 40 years. 

It’s easy to draw a straight cause-and-effect line between the two events, but the connection between today’s high inflation and the largest stimulus check injection in America’s economic history is a bit more complicated than that.

The Stimulus Check Payments Fueled Inflation — But Not All of It

Inflation is a normal and natural side effect of economic expansion. As businesses grow, they hire more workers, unemployment falls and households have more money to spend, so demand for goods and services increases, which causes prices to rise.

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The economic impact of the pandemic, however, was neither normal nor natural, and the same could be said for today’s 8.3% inflation rate, which is finally trending down a bit after resting for months at a 40-year high, according to the Wall Street Journal.

In times of normal economic expansion, prices rise slowly as money slowly enters the economy, so it stands to reason that a sudden influx of trillions of stimulus check dollars would send prices up quickly.

So are the stimulus check payments to blame for today’s high inflation, as some voices on the politically toxic subject would have you believe?

There’s no question that the payments are responsible for at least some of it — but how much? The most reliable approximation comes from the Federal Reserve Bank of San Francisco, which estimated at the end of March that government stimulus may have added three percentage points to the national inflation rate.

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