Stimulus payments keep on coming, as some of the benefits from the American Rescue Plan may be collected in 2022, like 2021 tax refunds for parents of newborns in that year. And they may be a significant relief for low-income Americans who strive to cope with inflation that chips away their tight spending budgets.
But are stimulus checks behind the spike in inflation seen in the last year in the first place?
Louis Wolkenstein, Managing Principal at The Investment Advisor, thinks that stimulus checks have very little to do with the underlying cause of inflation.
“Inflation is being caused by the rise in the price of oil and the fact the cost of a shipping container has risen from $2,000 to $20,000 and recently settled at $14,000 as a consequence of the coronavirus,” he said. “Furthermore, the lack of desire to work by people who feel unsafe from the virus, are caring for children not in school or elderly parents cannot justify working when they can’t cover these costs by working.”
Still, blaming a 7% inflation spike — a 30-year high — on rising oil and shipping prices may be a too narrow view of the problem.
Inflation is about the rising prices of a broad range of goods and services over a prolonged period. And standard economic theory tells us that these prices are determined by aggregate demand —the total market for all final goods and services produced in an economy, and aggregate supply —the total supply of all final goods and services produced in the economy.
As a result, inflation can be caused by a precipitous increase in aggregate demand, a steep fall in aggregate supply, or both.
The recent rise in inflation is a combination of rising demand, due to low-interest rates and stimulus checks, and a shortfall on the supply side, due to supply chain bottlenecks and labor shortages.
“Typically, increasing government spending or the money supply leads to inflation,” said Dean Kaplan, President and CEO of The Kaplan Group. “The stimulus checks increased government spending by giving the money to qualifying individuals with the expectation that most of them would spend it for consumables, durables or debt paydown. This alone would expect to have some impact on inflation.”
Supply chain issues magnify that impact.
“With many product shortages and people having more money to spend, they are driving up the prices of some goods,” said Kaplan.
Simply put, the impact of stimulus checks on inflation is a matter of timing. They boosted demand for goods at a time the supply of these goods was strained by supply chain woes and labor shortages.
A study published in October by the Federal Reserve Bank of San Francisco found that 2021 and 2022 inflation were 0.3 basis points higher than it would have been without stimulus checks.
“The American Rescue Plan provided fiscal support during a strong economic rebound, raising concerns about the risk of fueling inflation,” the study reads. “One way to assess this risk of economic overheating uses the ratio of job vacancies to unemployment, which measures labor market slack more accurately and, hence, can predict future inflation better than the unemployment rate alone. Estimates suggest that the fiscal plan acts to temporarily raise the vacancy-to-unemployment ratio, in turn pushing up inflation by about 0.3 percentage point per year through 2022.”
What about the impact of stimulus checks on inflation beyond 2022? It should be muted unless there’s another round of stimulus payments, or perhaps, cost of living adjustment payments.
Meanwhile, the ease of supply chain bottlenecks will help bring inflation down.
And that could bring relief for everyone, especially for low-income Americans who are affected the most by rising prices of essential goods and services.
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