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Tuesday, December 6, 2022

Suspicion Persist That Past Stimulus Check Stoked Inflation

Less than a couple of years ago the American economy was in desperate need of a strong stimulus (and stimulus checks) to keep it going even as the pandemic led to an unprecedented economic downturn. In an unexpected turn of events now seen since WW II, the country was shut down completely to prevent the pandemic from spreading rapidly. This led to a total economic downturn.

Millions of Americans lost their jobs as the economy ground to a halt. People who lived paycheck-to-paycheck and small business owners were suddenly without a source of income and faced imminent starvation, the prospect of credit default, and homelessness. The federal administration realized America was in desperate need of immediate relief and responded fast to prevent chaos.

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Within weeks of the shutdown in February 2022, lawmakers had passed a $2.2 trillion direct stimulus package that provided immediate relief to low and moderate-income citizens, directly sending them a $1,200 stimulus check that cut through bureaucratic red tape. This measure was followed by two more installments of COVID-19 relief measures, one in December 2020 and the third one immediately afterward in March 2021.

These measures added up to one of the most generous fiscal responses to the virus ever. The stimulus was not limited to individuals and families. The last of the three stimulus checks, the economic impact payment, was part of the American Rescue Plan Act signed by President Biden in March 2021.

The ARPA was a comprehensive package that included support measures for various sections of society including businesses, an organization such as hospitals and educational institutions, and local and state governments.

Stimulus Check
Stimulus Check
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This comprehensive support enabled businesses to survive the initial onslaught of the economic downturn. Despite a total shutdown, they continued to pay workers and were able to turn around immediately after the US economy reopened after the brief shutdown. Direct support to states and other local bodies enabled them to spend the money on local developmental work.

The Stimulus Checks And The Parallel Support Measures Came With Unintended And Unforeseen Consequences

But the generous support measures had a catch. And the indications were clear right in April 2021 when inflation began to rise from the flat figures that have remained consistent for years. For the first time in years, it crossed 4% to end at 4.2%, the fastest rise since 2008.

At that time the Federal Reserve officials saw the rise as temporary and not likely to influence policy. But the rise was inexorable and would turn out to be long-term, leading to the highest rate since November 1981 when it hit 9.1% in June 2022.

By the turn of the year, it was clear that America was headed for the highest inflation in decades. The aftereffects of the pandemic had taken some time to hit home, but strike it did. The stimulus checks were part of a significant, but the unintended cost of the pandemic, the high inflation rate.

It remains uncertain if inflation has peaked, but the situation is politically and economically volatile and toxic. It has left most policymakers, economists, and advocates confronting the question of whether the stimulus checks were a mistake, mainly the economic impact payment, or the third payment.

The Stimulus Checks Helped Prop Up The Economy But Did It Help Fuel Inflation On Its Own

The stimulus checks on the one had undoubtedly helped people in tangible ways that cannot be measured against any other yardstick. It prevented large-scale poverty and homelessness, something that no other measure could have prevented at that stage of the pandemic.

The only reason that millions of low and medium-income people could stay afloat during the pandemic and immediately after was this direct and immediate support from the federal administration. The Census Bureau measure for supplemental poverty revealed that the stimulus checks helped keep 11.7 million people out of poverty and homelessness.

Despite the onslaught of the pandemic, the poverty rate fell to 9.1% from a high of 11.8%. and it was estimated to fall even further to 7.7%. it becomes apparent that the stimulus checks were directly behind the dramatic fall in poverty levels.

The stimulus checks also cushioned low-income workers and protected the worst economic crisis in modern history. And it was also responsible for the economy rebounding in record time.

Stimulus Check
Stimulus Check

When Americans received the first stimulus check of $1,200 in April 2020, the unemployment rate had risen to an alarming 14.7% within weeks of the shutdown. But two years down the line it is back to the level it was before the pandemic, with many jobs opening up with the easing of the economic shutdown.

It is wrong to forget that the support people received was overwhelming, and was instrumental in ensuring that the economy recovered as quickly as it did. But there is also evidence that the stimulus check and other federal support measures, especially the economic impact payment, were likely behind stoking higher prices for the very population it was meant to protect.

But it would be unfair to pin all the blame on the stimulus support measures. There were several unrelated causes. While the war in Europe was a completely separate issue, it was instrumental in jacking up the prices of oil. Russia being the third largest oil and gas producer in the world, sanctions against it have harmed the US instead, while Europe continues to draw oil from it.

The second major reason for the high inflation was the supply global supply chain issues. But the divergence of inflation figures between Europe and the US indicates that these two reasons were not the only ones and there was more to it. Recent analysis has indicated that the stimulus checks may have raised inflation in the US by around 3 percentage points by the end of 2021.

This has left Americans struggling to meet expenses as inflation has consistently outpaced wage growth. There has been a 5.6% growth in wages last year, a number that can be considered healthy under normal circumstances. But an average inflation rate of 8.5%, a figure that has persisted even in the second quarter of 2022, has meant that Americans have faced close to a 3% decrease in wages when adjusted for inflation.

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