More States Move Ahead Wit Stimulus Checks For Residents In 2022: Will That Affect Inflation?

recession Stimulus Check
Stimulus Check

Even as people continue to battle high inflation figures and rising prices, the chances of any further federal support wane. The fourth stimulus check is now completely out of the consideration of Washington lawmakers. Simultaneously, the sharp rise in consumer spending following the surge in income for households during the pandemic is believed to have contributed at least partly to the inflation.

America received additional COVID-19 relief during the pandemic from the federal administration, which helps build a strong foundation that further accelerated consumption starting from the second quarter. This increase in spending lasted right up to the end of 2021 as people received various forms of stimulus checks.

The third stimulus check, or the Economic Impact Payment, signed by President Biden in March 2021 gave the household a generous sum that crossed even $5,000 in many households. The stimulus check was accompanied by a host of support measures under the American Rescue Plan Act for businesses, state governments, local bodies, and other organizations.

The Second Quarter Marked The Beginning Of A Brief Economic Rebound

Labor costs too jumped up the highest in 14 years in the first quarter. This was driven by a pick-up in the growth of wages. Companies competed with one another to retain workers amidst a severe shortage. People chose to stay home during the pandemic and immediately afterward and many were forced to stay at home to take care of their family members.

The massive $1.9 trillion fiscal stimulus drive and the rapidly improving public health situation with the introduction of the vaccine unleashed a pent-up demand. The introduction of the third stimulus check as part of the pandemic rescue package boosted personal income by 21.1% after a drop of 7.0% in February.

Consumer spending registered a big jump. It accounts for over two-thirds of the economic activity of America, and it showed an increase of 4.2% in March as the stimulus checks were declared after falling one percent in February, as per data released then by the Commerce Department. the news was close to what the economists expected.

The Third Stimulus Check Caused A Build Up Of Savings

A large part of the third stimulus check was stashed away as citizens had just received the second stimulus check and were already flush with funds. The savings rate spiked to 27.6% from 13.9% at the end of February. Households had by then amassed around $2.2 trillion of excess savings. It provided a powerful boost to consumer spending that year and beyond. The household sentiment was at a 13-month high in April.

This sudden boost in savings was followed b the spurt in consumer spending and people spent heavily on consumer goods, more than what the market could supply at that stage, tied down as it was by supply issues and a severe shortage of labor.

Naturally, a recession or economic disruption is normally followed by a period of high inflation, and that is just what the US began facing right at the end of the third quarter of 2021.

The American economy heated up way above the normal figures post the economic disruption caused by the pandemic. The reason behind it is varied, but it is obvious that the pandemic was the primary factor behind it.

The stimulus checks and other relief measures initiated by the successive federal administration also played their part but not so much as the critics would like the people to believe.

The Stimulus Check And Inflation

Despite critics speaking of $6 trillion being spent on stimulus checks, the fact remains that the money helped the American economy to recover and helped households in the face of imminent starvation. And only $900 billion of that amount was spent directly on stimulus checks in the three rounds of the economic impact payments.

The opposition Republicans have sought to blame the stimulus check for the high inflation in the country. But they conveniently chose to ignore the fact the stimulus check prevented people from starving in their millions, going deeply into debt, defaulting on their payments, and ending up homeless.

The effect that the stimulus checks and other allied measures had on inflation was not parsed out individually. There were multiple COVID-19 measures like the extended unemployment benefits during the pandemic, the enhanced Child Tax Credit advance stimulus check payments, the Paycheck Protection Program, and many more.

These support measures collectively injected trillions into the American economy. The America Rescue Plan Act signed by President Biden alone approved $1.9 trillion in pandemic relief and stimulus.

The effect that the Rescue Plan had on the inflation figures was looked in by the San Francisco Federal Reserve Bank. It calculated that the third stimulus check and linked measures led to a temporary spike in inflation, but never the overheating as has been suggested by right-wing economists and the Republicans.

Their study discovered that the Rescue Plan caused inflation in the region of around 0.3 percentage points in 2021 and over 0.2 percentage points in 2022. The impact is expected to be negligible in 2023.

The Economic Heat Of The War In Europe Is Conveniently Forgotten For Its Effect On The Inflation Rate

The expected economic boom in the world economy starting from the European zone has been stopped abruptly as Europe degenerated into a war that started on the Ukrainian front with Russia and affected the whole of Europe and Asia.

The European Union has been resisting pressures from the US to cut back on its reliance on Russian energy, but the step has come at a steep cost for the US.

The US is already being battered by the surge in inflation that has reached record highs. The supply bottlenecks and the economic fallout of the war in Europe have been the main reasons for the 40-year record inflation and will not go away anytime soon as the situation threatens to spiral out of control.

The states have jumped into the picture with their brand of stimulus checks. California is the latest to announce a stimulus check that could go up to $1,050 for a family of three. Opponents of the move are worried about a further spike in inflation which has already breached the 9% mark in June and stands at 9.1%.

But the number of states who are sending payments to their residents is just around a dozen and economists say that it is not expected to have much of a negative effect on the economy.

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