While inflation has hit the world economy badly, it appears to have singled out the US among the advanced economies. Gasoline prices have almost doubled over 2020 rates while food and other essential items continue to rise steadily since the last quarter of 2021. While the federal administration has blamed production and supply issues, and the war in Europe, for the mess, leading economists say that the successive stimulus checks were majorly to blame for the crisis.
The consensus is that high inflation will continue to plague the economy at least this year before it eases off. The intervention by the Federal Reserve has led to its raising short-term rates by 0.75%. It is the biggest single hike in 28 years as they try to stamp down inflation by raising borrowing costs. The central bank has signaled more rate hikes in 2022 itself.
The Federal Reserve has been trying to rein in inflation while avoiding a recession, something that the American economy managed to avoid even during the peak period of the pandemic. This was in part thanks to the measures taken by the federal administration which pumped in large money to prop up businesses across the country and also helped states, cities, and other local bodies with funds to keep up a semblance of normalcy in the economy.
The Stimulus Checks And Inflation
The stimulus checks and the other monetary support measures cost the federal administration around $5 trillion. Around $900 billion alone went towards the three stimulus checks starting with the $1,200 stimulus check issued in March 2020 immediately after the country went into a long lockdown due to the pandemic.
The Federal administration pumped in another $2,000 in stimulus checks in the space of another year. While the inflation was a combination of several factors, the inflation is believed to have contributed around 3% to the total inflation.
The US Federal Reserve could deliver a bigger interest rate hike at its policy meeting later in the month after an unexpectedly higher than normal inflation report revealed pressure on prices. Prices are already running at a 4-decade high and have been steadily increasing as the inflation rate refuses to drop.
The inflation is having an outsized impact on the cost of food and gas prices, badly hurting the typical American household. The consumer price index rose 9.1% just last month from a year earlier. It has driven up the price of gas, food, utilities, and rent.
Gas prices have almost doubled in the last two years though it has somewhat eased in the last two weeks. Federal Reserve Chairman Jerome Powell has focused on slowing down inflation, a priority for Joe Biden in an election year.
These price issues are fuelling concerns that if the administration does not get its act together to contain inflation soon, consumer and business expectations of a tumultuous state of price increases in the future could become rooted. This would force the Fed to move in more aggressively to have any impact.
State Stimulus Checks Could Upset An Already Aggravated Situation
While the prospects of further stimulus checks from the federal administration are nil at present, states are moving in to protect their residents from the runaway inflation rate that has pushed up prices of gasoline, food, and other essentials to record levels.
Inflation meanwhile remains at a 4-decade high amidst the warning of another recession in the US economy. While experts believe that the three rounds of stimulus checks along with other measures taken by the federal administration have led to inflation, the further stimulus payments proposed by the state governments are further adding to concerns.
Already several states have legislated on the issue including New Mexico and Maine. These states are already a month into their distribution process and are sending out generous stimulus checks even to middle-income families and individuals. Experts say that giving out stimulus checks to everyone without weighing the merits of the case will backfire in the long run and increase inflation.
The third stimulus check came immediately after the $600 stimulus check in December 2020. People had money on their hands. Much of the third stimulus check amount remained in the hands of families who were economically not affected due to the pandemic and the economic downturn.
The money was used to buy goods even as the supply logjam led to a crisis. this fuelled inflation to a great extent.
States Have Already Begun Sending Out Stimulus Payments
California is among the latest state to declare a $1,050 max stimulus check to a family of at least three members. Around 23 million residents are expected to benefit from this largesse. Governor Gavin Newsom had earlier proposed a $400 gas card for every car owned by residents with a maximum of two cards per family. Transit cards were to be given to people who did not own cars. But the current proposal promises to be more generous.
GOv. Newsom has said that the goal of the stimulus check issued by the Golden State will help combat inflation and rising costs. He said that it was tough for Californians and the administration realized it and returned $9.5 billion of the surplus money held by the state.
The Oregon state administration has said that it would go for a $600 stimulus check to over 236,000 households who were beneficiaries of the EITC on their 2020 returns.
Colorado Governor Jared Polis has announced that residents could get up to $1,500 for joint filers and half that for individuals.
While Maine and New Mexico have moved ahead with stimulus checks for their residents, Delaware, Georgia, Idaho, Indiana, New Jersey, South Carolina, Illinois, and Virginia are also in various states for issuing stimulus checks for eligible residents.
Economist Lawrence Summers, a former Treasury Secretary, said that the stimulus checks could set inflationary pressures unseen previously. There could be negative consequences for the financial stability of the country and the value of the US dollar. The US has faced a higher rate of inflation compared to other advanced economies. And the reason, economists contend, was due to the massive stimulus checks payments over a year and a half.
The state stimulus checks could prove to be a short-term solution but could also create the same disruption that the federal stimulus checks did, and upset the balance of demand and supply.