The successive stimulus checks that started with the spread of the COVID-19 pandemic were a great boon to low and middle-income Americans. For many, it was their only source of income as businesses shut down and millions of workers were rendered unemployed immediately as some sectors shut down completely.
The successive stimulus checks were given based on individual and family income and went directly to the most deserving sections of society even as they struggled to put food on their tables and pay their rent and for their utilities.
But while it kept the fires burning in millions of homes, there was apprehension among a section of economists that it was behind the inflation that began creeping upward soon after the third stimulus check was issued.
Even as it began to inch northward, the administration assured the nation that it was a temporary phenomenon and the economic recession coupled with the sudden injection of trillions of dollars was the cause. They assured citizens that it would soon flatten out within the year.
But the inflation kept rising and by 2022 it had reached 8.5%, the highest level in over 4 decades. It became an ongoing financial strain for the whole population as they faced high prices at the gas station, the grocery checkout lane, at cloth stores, even as they paid their rent and utilities or bargained for a car.
As the year rolled in 2022, inflation was at 7.5%, the fastest year-over-year increase since 1982, as revealed by the Labor Department. Even not accounting for the volatile energy and food prices, core inflation leaped to 6% over the past year. It was also the sharpest such jump in four decades. Over the past year, the price of rice was phenomenal. It was 41% for trucks and cars, 18% for bacon, 40% for gasoline, 11% for various dresses, and 14% for furniture.
Fed Reserve Misjudged The Severity Of The Inflation
The Fed was not prepared for this wave of inflationary rise in prices, both in its severity and persistence. The Federal Reserve’s policymakers had forecast that consumer inflation would stay below the 2% annual target and end the year at around 1.8%.
But after a decade of remaining dormant, the high inflation reasserted itself brutally. While the government consumer price index was running at just 1.7% ahead of its figure a year before in February 2021, subsequently the year-over-year price increase accelerated steadily. It was 2.7% in March, 4.2% in April, 4.9% in May, and 5.3% in June.
By October the figure rose to 6.2%, to 6.8% a month later, finally ending the year at 7.1%.
For months the Federal Reserve Chairman Jerome Powell and other leading officials had characterized the high consumer prices as merely a transitory phenomenon. They blamed it on shipping delays, temporary shortages of workers, and raw materials, even as the economy bounced back from the recession during the pandemic faster than anticipated by even the most optimistic of economists.
Many economists expect the consumer inflation rate to remain high well into 2022. They say that demand will continue outstripping supplies in multiple areas of the economy.
They say inflation remains the single largest short-term challenge to the US economy. Price pressures are expected to ease as the year progresses, but inflation will remain way above the 2% targeted by the Federal Reserve for some time into the near future.
The Fed thus has changed direction radically. In January the central bank first indicated that it would go for a series of hikes in rates. Thus, they would be moving away from the extremely low rates that helped prop up the economy from the devastating recession in 2020 triggered by the pandemic. But that ultimately contributed to fuelling the price hike of fuel and other essential goods.
Are Stimulus Checks The Main Factors Contributing To The Spike In Inflation
Even as the COVID-19 pandemic paralyzed the US economy in the spring of 2020 with a total all-around lockdown, businesses sharply cut back production or shut down completely. Consumers stayed home out of fear and employers were forced to slash a breathtaking 22 million jobs.
Economic output plunged at a dizzying 31% annual rate in the second quarter of 2020. There was more misery in the offing as companies postponed restocking and cut investments. It led to a brutal recession.
But instead of sinking into a long-term downturn, the economy staged a dramatic recovery as the Fed pumped in dollars through direct stimulus checks and support to business, state, and local bodies.
Buoyed by the successive stimulus checks, and emboldened by the rollout of the vaccines, consumers returned to shops, restaurants, airports, and shopping malls in large numbers.
Businesses scrambled to meet the sudden spurt in demand. But they were hampered by the shortage of workers and raw materials. Ports and freight yards struggled to handle the sudden increase in traffic. Global supply chains seized.
The high demand led to a rise in prices as companies discovered that they could charge consumers higher in a market fuelled by high demands. The stimulus checks had put cash into the hands of many Americans and they could not spend it during the lockdown period.
Right-Wing Economists Blame Inflation Directly On Stimulus Checks
Critics, including Lawrence Summers, the former Secretary of the Treasury have majorly blamed President Joe Biden’s $1.9T pandemic relief package. The $1,400 stimulus checks that went to most households were directly blamed for triggering the inflation as it was blamed for overheating an economy that was already scorching.
In such a scenario, the federal administration is wary of another direct stimulus check even though data proves that it had a strong impact on easing poverty and bringing down unemployment. Analysts concur that while another federal stimulus check could help citizens, especially low-income groups, cope with the high inflation, it is unlikely at this stage.
As these households normally have less money during such emergencies, protecting them from inflation was necessary at this critical juncture.
Andrew Yang, the former presidential candidate, feels that the stimulus checks have taken a lot of unfair blame for the high inflation figures. He said that the people had the stimulus check money in their hands only for a couple of months and that was a minor factor as the money was spent long back, but inflation continues to rise.