Can Additional Stimulus Check Bring Relief To Citizens: How Much Have Relief Payments Contributed To Inflation?

Stimulus Check
Stimulus Check

Americans, especially low and moderate-income citizens, managed to stay above poverty thanks to the $5T of money that the federal administration injected directly into the hands of people and businesses during the peak period of the pandemic starting in January 2020. And households and small businesses received the largest share of the money.

Over a trillion dollars moved into personal accounts through the series of federal stimulus checks and later the enhanced Child Tax Credit stimulus checks. There were also the unemployment benefits were extended in light of the pandemic shutdown.

Citizens received trillions more indirectly through enhancement programs like SNAP. But by the end of the first installment of the Child Tax Credit payments in December, prices had started to move up at an alarming pace as the inflation rate reached a 4 decade high at the turn of the year.

Critics of the stimulus support were quick to point toward the stimulus checks and similar support from the situation as they argued that injecting too much money directly into the economy was bound to cause inflation.

As prices continued to rise across the nation at rates unseen in 4 decades, it was clear that the stimulus checks had an unintended and significant side effect, inflation. While it remains unclear whether inflation has peaked, the fallout has been toxic both on the political and economic front as argument rages whether the stimulus checks had to take the whole blame for inflation.

 

The Stimulus Check Contribution To Inflation Was Negligible

While inflation is a natural and normal side effect of any economic expansion, the pandemic and its aftermaths were bound to create a mess even after things returned to normalcy on the health front. The economic downturn fuelled by the pandemic was bound to have its negative effect much after the pandemic exited.

The infusion of trillions of dollars sent up prices rather quickly. But then it is wrong to blame the stimulus checks for today’s record inflation rate. There were a lot of other factors that led to inflation.

Experts believe that it was a combination of several factors, and it has affected the whole world, not just the US. Economists believe that the pandemic led to a shift in consumer demand from services to more towards goods. The sudden demand led to a disproportionate gap between demand and supply and led to a shortfall. It naturally led to an increase in prices.

Factories remain closed for extended periods and some shut down totally during the peak months of the pandemic. This led to a drastic reduction in production which also led to a rise in prices.

The final straw was the war in Europe. The sanction against the Russians backfired and affected Europe and the US in equal measure as they were dependent on Russian oil. The other oil-producing nations, especially Saudi Arabia, jacked-up prices, and in the end it was the US that ended up the loser in the exchange.

The Economic Benefits Of The Stimulus Checks Were Big

The stimulus checks during the extended months of the pandemic undoubtedly allowed Americans to push their way out of poverty. Around 11.7M people moved out of the clutches of poverty in 2020 thanks to the stimulus checks.

The poverty rate fell from 11.8% to 9.1%. it fell even further to 7.7% in 2021. It was clear that in the absence of any other drivers, it was the stimulus check that was behind this dramatic improvement in the situation.

This cushioning of workers during the worst economic crisis in modern history helped the economy move back on track much faster even as the situation returned to normalcy. The unemployment rate was at an alarming 14.7% when the first round of stimulus checks was declared. It returned to its pre-pandemic level a couple of years later and there were many job openings too. The support that people received during the lean months helped them, and the economy, to recover as quickly as they did.

Injection Of Cash And Inflation

But there are also signs that the stimulus check, especially the Economic Impact Payments, stoked higher prices for the people it intended to help in the first place.

The International Monetary Fund maintains that when the supply of money becomes too high relative to the size of a nation’s economy, the national currency is devalued, and the unit value of the currency diminishes. Thus, its purchasing capacity plunges and prices naturally begin to rise.

But there was also the issue of disruption in production such as the pandemic that raised the cost of production. That, along with the high oil prices caused by its scarcity, reduces overall supply and led to the cost-push cause of inflation. Here, the impetus for a price increase comes from supply disruption.

Post the pandemic, the US faced both simultaneously. While the massive influx of money directly into the hands of people increased the money floating around in the economy, it led to soaring demand for goods even as the scarcity of oil and the interruption in the supply chain led to disruption in shipping and production.

The Low And Moderate Income Population Most Affected By The Inflation

The inflation rate has outpaced the growth in wages for quite some time. Despite the 5.6% jump in wages, the sustained inflation rate at over % has meant that Americans are facing a 3% decrease in inflation-adjusted wages.

This issue was not unforeseen either. Back in the first quarter of 2021, some economists raised the alarm about the size of the American Rescue Plan Act, led by the $1,400 stimulus check to individual Americans. But economists then also realized that putting too little money into the economy had a greater risk.

The decision to go for the 1,400 stimulus check was largely a political decision based on an election promise to give a $2,000 stimulus check to citizens. With $600 already given in December, there was no way the incoming President could go back on his promise before the Georgia run-off elections, which the Democrats won comfortably.

The stimulus check had bipartisan support among the electorate then, as they were hurting from the economic situation. But post the pandemic, the move seems to have backfired and President Biden’s support base has waned considerable, even among the core Democrat voters.

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