The Federal Stimulus Check Played A Big Part In American Life: How Much Of An Impact Will State Inflation Reliefs Have?

stimulus checks

The COVID-19 relief Stimulus Check provided an emergency that positively impacted the lives of tens of millions of Americans facing financial insecurity as the whole economy shut down in the first quarter of 2020. A study was immediately conducted to know how Americans were managing to put food on their tables or pay for essential expenses.

It was apparent that people were struggling on every front and losing badly. People living paycheck-to-paycheck were suddenly denied the basics of life and were struggling to cope with the necessities. The only thing that made sense at that moment was for an immediate cash transfer policy cutting across the bureaucratic red tape. It made an immense difference in the lives of families struggling to make ends meet.

In hindsight, there has been a lot of criticism that the stimulus checks led to inflation and kept people away from joining the workforce. Another oft-quoted criticism of the stimulus check was that a lot of the money went out to people who did not deserve the money in the first place, people whose income was not interrupted by the pandemic.

The pandemic precipitated the deepest and sharpest slump in the economy since the Great Depression. The economy recovered by millions continue to hurt, either due to unemployment, or rising prices that have put even the most essential of items out of the reach of American households.

The pandemic was particularly severe in certain sectors of the economy and also certain sections. Low-income workers, most of whom live paycheck-to-paycheck, women, and racial and ethnic minorities were the worst affected. And it was also these groups that the federal administration had the toughest time reaching out with stimulus check payments as most of these groups did not maintain records with the administration in the form of income tax files.

This to a certain extent established the complaint that the stimulus checks did not fully help those who deserved it the most. It caused many Americans to be further left behind in an already unequal economy.

Containing The Inflation And Its Link To The Stimulus Checks

Businesses around the world started raising their prices at an unprecedented rate. It was the highest rate of increase in decades and among the major economies, the US was hit the hardest.

Prices jumped at an annualized rate of 4.7% in 2021, faster than any other country in the advanced economies, the Group of Seven (G-7). In comparison inflation in the UK stayed at a low of 2.5%. inflation in the US has been consistently staying above the 8.5% mark and touched an alarming 9.1% in June.

And most of the forces that normally drive inflation and were at work this time were not limited to the US. Europe and other global economies were equally affected. Supply disruption from the pandemic, high food prices, and disruption due to climate change have led to droughts and severe storms hitting agricultural produce. But Europe and Asia have been equally affected.

The reason the US came out badly out of the pandemic was the high demand. And one reason for this high demand for products is being blamed on the massive input of over $5 trillion that the federal administration pumped into the US economy, giving direct stimulus checks to millions of citizens affected by the pandemic.

These three rounds of stimulus checks put an unprecedented amount of money in the hands of low and medium-income groups, an amount that they never had in their hands even in normal times. Most people who were used to living paycheck-to-paycheck received over $10,000 for a family of even 3 members over a year. the third stimulus check was the most generous and it came at a time when the economy was on the road to recovery and people were joining the workforce in large numbers.

Stimulus Check Cushioned Family Finances But Contributed To Long-Term Negative Effects

The third stimulus check, part of the American Rescue Plan Act, came immediately after the second stimulus check. it helped cushion family finances, and people suddenly found they had excess money in their hands. This fueled demand for goods as it helped people move into non-essential products.

There was a huge surge in the demand for goods like cars, electronic items, and furniture. Shoppers were redirecting money that they normally would have spent on travel and in restaurants.

And the supply of these goods, severely affected by the supply gridlock, could not keep up with this high demand. And this was aggravated by a shortage of workers who were unwilling to join the workforce for two reasons, one was the persisting fear of the pandemic and the other was that they had sufficient money in hand and were in no hurry for fear of contracting COVID-19.

The state stimulus checks are being sent out to contain the damage done by the record inflation. But they have also come under the same criticism for further aggravating the high inflation that threatens to push the nation towards another recession.

Recent studies by the San Francisco Federal Reserve concluded that the pandemic relief packages could have contributed to as much as 3% to the inflation rate till December 2021. This factor could thus explain the reason for the high rate of inflation in the US. and it is this percentage difference that the US has consistently maintained over other leading economies of Europe and the UK.

Thus these measures infused considerable liquidity into the hands of consumers when the industry, reeling under the onslaught of the pandemic, was not quite ready to respond equally to this increase in demand. This indicated that the current woes plaguing the US economy were more of a demand push inflation.

Federal Response Was Also Slow

Well before that stimulus check packages were passed, policymakers and economists had indicated the after-effects of the direct aid by the federal administration. But it was hoped that the inflation spike would be transitory and would fade as COVID-related supply chain issues eased across the world, even as more workers joined the workforce.

The response from the Federal Reserve was slow even as the first signs of increase loomed back in April 2021 when the rate jumped over the 4% mark, doubling within a month and touching that rate for the first time in over a decade.

With the state stimulus checks being sent out to contain the damage done by the record inflation, there are further worries of the situation aggravating. But they have also come under the same criticism for further affecting the high inflation that threatens to push the nation towards another recession.