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Monday, September 26, 2022

Linking The Stimulus Checks To High Inflation: How Much Of An Influence Did The Three Federal Relief Payments Have On The High Prices Today?

The successive stimulus checks kept America afloat during much of the pandemic, especially for the low and middle-income earning members of society. Thanks to the $5T avalanche of funds transferred directly from the government to the people starting March 2021, people were able to survive the economic downturn caused by the pandemic. But the massive inflation in 2022 has led to economists and policy experts blaming the relief measures for fuelling inflation.

Around $1 trillion of the total money was paid directly into personal bank accounts through direct stimulus checks and later under the enhanced child tax credit stimulus checks. Trillions trickled down indirectly through enhancement programs like SNAP.

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The last quarter of 2021 saw prices gradually begin to increase across the whole economy. Soon after inflation began rising and reached 40 years high of 8.5% in March 2022.

The Inflation And Its Effect On The Common Citizen

Both the Republican and the Democratic administrations respectively represented by Trump and Biden signed into law trillions of dollars in pandemic relief spending. The successive packages included a couple of bipartisan bills in 2020 that helped pour in over $3 trillion directly as stimulus checks into the American economy. This included both generous unemployment benefits and direct stimulus checks to individuals and families.

Another $1.9 trillion was pumped in 2021 by the Democrats under Biden called the American Rescue Plan Act.

Economists Had Indicated That Stimulus Checks Would Fuel Inflation, But Maintained Its Influence Would Be Mild

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Even as early as the third quarter of last year, new Federal Reserve Bank of San Francisco research suggested that inflation was likely getting a temporary boost from the $1.9 trillion coronavirus relief package signed by Biden at the end of the first quarter of 2021.

Critics of the government spending package include former Treasury Secretary Lawrence H. Summers. They have contended that the third stimulus check, or the Economic Impact Payments, was poorly targeted and said that it could overheat the economy.

Supporters of the stimulus checks have stressed that it provided critical aid to workers and businesses that continue to struggle due to the economic downturn caused by the pandemic.

Figures released then suggested that while the spending had some effect on inflation, there were signals that it was more likely to be temporary. Economists projected that it would add 0.3% points to the core Personal Consumption Expenditures inflation index, in 2021, and a bit more than 0.2% points in 2022.

Approaching Midterms Lead Republicans To Blame Stimulus Checks For Inflation

As midterm election races are in full swing, GOP candidates have found it convenient to point fingers at the $1.9 American Rescue Plan, spearheaded by Biden and passed by Congress in March 2021 with no Republican support. It was projected as the last steroid shot needed to boost the economy out of the downturn induced by the pandemic.

Prices for almost everything being bought by Americans, including groceries, gas, cars, housing, televisions, and clothes, have spiraled out of control in the past year. Inflation has been scarcely noticeable for decades and now is suddenly the top economic concern for most people. And it has caught Washington by surprise.

While President Biden played down the chances of persistent inflation in July last year by remarking that he expected the hikes to be temporary, this month he backtracked. President Biden has been forced to admit that reigning in prices was his top domestic priority.

Multiple Factors And Not Merely The Stimulus Checks, Played A Role In The Record Inflation Rate

A combination of factors that included supply chain problems directly linked to the pandemic, the dramatic surges after the initial phases of the pandemic, the war in Europe, and the dramatic change in patterns of consumer spending all led to prices going through the roof.

What made matters worse was that the increase was stated in seemingly disconnected and uneven ways. Initially, housing prices went up as the pandemic brought a change in how people wished to live. The prices of the rental car also were up as there was a shortage of cars with rental companies selling off their fleet during the peak months of the pandemic.

But these developments coalesced together to create a much wider calamity, shaking the political and economic foundation of America. It was clear that policymakers had miserably failed to recognize the mounting inflationary crisis.

Timeline Proves Leaders Failed To Pin Point The Severity And Cause Of Inflation

The Biden administration went against a warning from centrist economists and GOP opposition and signed the third round of stimulus checks under the $1.9T ARPA. The Treasury Secretary said that there was only a small risk of inflation and not a significant one. He called a northward movement in prices temporary.

But former Obama White House economic adviser Lawrence Summers warned of recession and stagflation in 2022. He said that Fed officials should factor in inflation and warned that they were not internalizing the magnitude of the error over the past year. He urged steps to ensure price stability. 

Summers warned that inflation and unemployment would both cross the 5% mark over the next years and would ultimately move towards a major recession. 

The last quarter saw the employment rate drop to 4.8% but large numbers of people, mostly women, were out of the labor force even as GDP growth fell in the 3rd quarter.

The turn of the year saw a big jump in the inflation rate and showed a 6.8% increase compared to the previous year. it was the largest jump since 1982. The inflation eased slightly to 8.3% in April this year. But it remains at its 40-year high with a long way to traverse before citizens get any relief.

The president insists that it is all down to the stimulus checks. He said that inflation has been fueled by two major causes, a once-in-a-century pandemic, followed immediately by the war in Europe.

Leading economists agree on several causes that led to inflation and have defined the American economy over the past months. The shift away from services to goods left people unable to meet rising demands.

The parallel closure of factories due to the pandemic sent prices even further up. And finally, the rise in gas prices due to the war increased costs all around in both the shipping and manufacturing sector and forced up prices of wheat and other commodities.

But it is also true that if the money supply grows too large as happened with the stimulus checks, the currency unit value diminishes as prices rise with falling purchasing power.

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