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Wednesday, September 28, 2022

With Federal Stimulus Checks On Hold, Over A Dozen States Step In To Support Residents: But Will It Worsen Inflation?

The pandemic-linked inflation is affecting the world economy by some nations are taking a harder knock for several reasons. Among the leading economies in the world, the US is starting to seem like an outlier. And the federal administration and the opposition are divided on the reason behind it, with the Republicans blaming the stimulus checks for the mess.

No other nation indeed went for fiscal stimulus during the pandemic as the Americans. Even as the pandemic shut down the nation, the Federal government began a series of stimulus checks, starting right in the month the nation and its economy went on a prolonged lockdown.

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The consensus among economists is that inflation will not go away easily. It has already been here for over three quarters and shows no sign of easing from its 4-decade record. And with the midterm elections around the corner, the present elevated level has the potential to cause a problem for President Biden and his party. It threatens to unravel his most ambitious economic measures at home and also for several other countries.

The Collapse Of The Global Supply Chains Was A Major Cause

Much of the present wave of inflation was driven by the stretched global production and supply chains. The problem of the longer delivery time of finished goods and parts, which is delaying production in the first place, is affecting all world economies. But the picture is the worst in the US. And it has led to higher price markups by firms.

Even as the world economy limped back to normalcy in the third quarter of 2021, supply chain disruptions across the US drove up prices and led to an acute shortage of raw materials, spare parts, and finished goods. 

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The supply-chain bottlenecks across the world caused severe shortages of most products that consumers in America are used to getting off the shelf. It ranged from electronics and automobiles to household essentials.

The global economy continues to face strong headwinds even as it gathered momentum towards a recovery. But the recovery continued to be stymied by supply chain disruptions at every stage and in every sector.

The lingering effect of the pandemic and the mitigation strategies severely reduced the production of services and goods and the world supply chains remained relentlessly disrupted for months together.

This result of the major imbalance between supply and demand eliminated all the inventory and upset the smooth functioning of the economy.

The Stimulus Checks Had A Major Role To Play In The Disruption

There were several factors contributing to the disruption of the supply chain and a major cause was that a growing number of workers stayed away from work. This disrupted the system like no other. And one reason that workers stayed away from jobs was the fiscal security afforded by the stimulus checks.

The three rounds of stimulus checks gave low and moderate-income families over $10,000, with individuals getting $3,200 from the stimulus checks alone. Then there were a host of other support measures including the enhanced unemployment stimulus checks, and extended child tax credit stimulus checks for families with children.

A record 4.3 million Americans quit their job in August 2021 alone, the highest since the labor department started tracking their data in 2000. Several sectors pay just the minimum wage and labor turned away to sectors that were the most profitable, creating large gaps in some sectors.

Companies like Target, Amazon, and Walmart even went out of the way to attract warehouse workers with attractive perks, including free college tuition.

Many large employers facing growing inflation jitters increased their wages to keep up with increasing prices. This led to intensified competition among companies to make their most compelling job offers to hire and retain workers amid the pre-holiday rush.

The American Trucking Association 2019 estimated that they already had a shortage of some 60,000 drivers, and retirement, and the pandemic led to a severe increase in that shortage.

The combined supply shortage was a strong reason that prices continued to rise unabated during that period and reached unmanageable highs in the first quarter of 2022. While the administration made a concerted effort to close the gaps in the supply chain, experts believe that untangling the supply chain mess will take much longer.

This will continue to affect prices at least in the short term.

States Step In With Stimulus Checks Amid Fears Of Further Inflation

Some states are offering stimulus checks in various forms and amounts as an immediate answer to high gas prices and soaring inflation. But economists continue to warn that the federal stimulus checks were majorly to blame for the inflation, along with the supply chain issues and the war in Europe.

Maine and New Mexico were the first states off the mark with inflation relief stimulus checks. But while Maine has issued a one-off stimulus check of $1,700 for families, New Mexico has spread the payments out over three months between June and August.

California on the other hand will give an inflation stimulus check that could go up to $1,050 for a family of at least three members.

Georgia Governor Brian Kemp meanwhile authorized a bill sending a one-time $250 stimulus check for individual filers and $500 for married couples filing jointly. Other states, including Delaware, Colorado, Idaho, Hawaii, and Indiana, are all moving towards various forms of stimulus checks.

Funds For The State Stimulus Checks

Most state governments had to face a tough 2020 as revenue collections dropped abysmally. But state revenues faced an amazing rebound in many economies and that resulted in higher revenues from corporations and individuals, way higher than initially projected. So in some respects, the states are spending the unanticipated surplus revenues from 2021 tax revenues.

The federal administration pumped around $5 trillion into the economy in the two years of the pandemic and its aftermath. This helped in reversing the economic downturn caused by the pandemic. But experts maintain that the three rounds of stimulus checks along with other fiscal support measures drove up inflation by around 3% in America.

Now experts say that these smaller payments being sent by the states could add to the already record inflation rate.

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