State Stimulus Checks Go Out In Large Numbers: Should The Payments Take The Blame For Record Inflation?

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stimulus checks
Stimulus Checks

While experts are of the view that the American Rescue Plan Act Stimulus Checks signed by President Biden may have a role to play in the record inflation that has assailed Americans. But they also concur that it may have been only one of their reasons as the government gave out more money to people than they needed. But they continue to disagree about the extent to which the stimulus checks fueled the inflation.

Going into the midterm elections, the GOP has blamed the Biden administration for the highest inflation in over 4 decades and has argued that the $1.9 trillion Rescue Plan was square to be blamed for the situation. Even in September, the inflation rate stayed at 8.2% year-on-year and 0.4% over August 2022 as per Consumer Price Index reports.

The senior most Republican on the House Budget Committee, Representative Jason Smith has blamed the American Rescue Plan as being the main reason that Americans have been forced into feeling the shock of rising prices each time they visit the gas station or the supermarket.

The GOP National Committee also tweeted that all Democrats who voted for the stimulus checks initiated by Biden immediately after he came to power were answerable at the ballot box for the spike in prices of essentials and also for making America poorer again. They said that the rise in prices had led to negative earnings for most Americans despite a rise in wages.

The rise in wages has been substantial pst the pandemic, but it has not been able to keep up with the rise in prices

The Rescue Plan was initiated with the sole aim of halting the sliding economy and sending out immediate relief payments to the poor and the middle class. It was a massive spending package that was signed on March 11 and was not limited to the $1,400 stimulus check.

it also expanded on the weekly unemployment insurance which was extended to September 6 2021 and the expanded Child Tax Credit stimulus checks which substantially increased the annual $2,000 to between $3,000 and $3,600 depending on the age of the child. The Rescue Plan also led to hundreds of billions in aid to local, tribal, and state governments.

The Debate Over The True Efficacy Of The Stimulus Checks Continues

Economists have for months debated the impact the Rescue Plan had on inflation. While most economists concur that the stimulus payments did worsen inflation by giving most people more money than they needed for their basic needs. They also said that the payments went out to people who did not need them in the first place.

Millions of Americans continued to draw pay after the initial shutdown, and many did not have to suffer even that setback. The stimulus checks came as a bonus for such households and it allowed them the luxury to save and spend on non-essential goods.

This was one of the many reasons that the inflation rate spiked abruptly after the Rescue Plan payments, pointing out detractors of the third stimulus checks. The economic impact payment came within a couple of months of the second stimulus check of $600.

Though the payment was declared in December 2020, the second stimulus check payments were only made in January 2021. The third stimulus check started going out only two months later in the third week of March 2021.

This led to millions of families receiving up to $10,000 in a space of two months. For those who continued to get their normal wages or income throughout the pandemic, the amount was a bonus.

This led to a spurt in saving and payment of debts, especially high-interest credit card debts. But it also led to a spurt in spending, mainly on products, as people could not spend on the service industry like travel and tourism, which remained shut due to the pandemic.

This sudden spurt in the demand for goods led to a shortage, compounded by the supply chain disruption brought about by the pandemic. this led to a further rise in prices and as with inflation, once it goes on a rising spree, it takes time to settle down to a more manageable level.

Housing Costs And The Stimulus Checks

Experts also say that recent research and fresh data have confirmed their contention that the stimulus package did not affect fuel inflation significantly.

The increase in housing costs, they aver, has caused a big rise in inflation. The shelter continues to be the biggest element of the Consumer Price Index and comprises a whopping 30% of the total inflation rate as measured by the index.

Senior economist Dean Baker argued that fresh research covering the housing sector and linked inflation supports the theory that price gains were majorly the result of a tectonic shift to remote work and not the stimulus checks as alleged.

The Center for Economic and Policy Research co-founder contended that as people moved to remote work in greater numbers, the housing prices went up and that in turn jacked up the overall inflation rate to greater heights.

The San Francisco Fed compared the rapid increase in the prices of the housing sectors and if remote work, or more factors like the stimulus checks led to the rise in overall prices.

Authors, John Mondragon, Johannes, Wieland, and Augustus Kmetz wrote that with more people starting to work remotely, they wanted more space at home. That led to a spike in the demand for housing and was behind the leap in prices in the housing sector.

The research team said that the shift to remote forms of work led to a rise in the prices in the housing sector by around 15% starting November 2019 to November 2021. This period accounted for more than 60% of the total rise in prices in the housing sector.

They said that it is clear from this information that the stimulus check was being unfairly blamed for the record inflation that has assailed low and moderate-income groups through the last quarter of 2021 and continues to this day.

Experts say that inflation could have been averted to a large extent if interest rates had been raised earlier in 2021 and avoided paying the third stimulus check. but the cost of such a move would have been high. It could have led to millions of homeless people going without food as people were shut out of all avenues of income.