Even as the US rebounded from the COVID-19 pandemic, it encountered an elevated inflation rate, a byproduct fueled partly by low-interest rates, a supply logjam, the war in Europe, and also in part by the federal stimulus checks. But the situation remains grim for low and middle-income earners as the high inflation rates have led to a real-time decrease in wages even though it has gone up in recent months.
The record inflation rate has effectively wiped out the savings of most Americans, which had seen an admirable rise during the pandemic months and thereafter as the economy boomed for a brief period.
The situation eased somewhat after a horrendous first and second quarter of 2022. There was a decrease in price pressures across energy categories as gas prices slid down 7.7% in July from the prior month. Airline fares, apparel, and used-car prices dropped on a month-on-month basis.
But the situation remained bleak on the food and groceries front as prices were up 1.3% in July over the previous month. And it continued to be 13.1% up over the rate a year back. it is the fastest annual rise since 1979.
It has been somewhat of a mixed blessing for individual families. They have got some relief as the prices of gasoline have eased a bit, but the pain continues in the food sector.
While the average national price of a gallon of regular gasoline fell to $4, it continues to be considerably higher than prices a year ago. The high prices of food items could moderate a bit in the coming months. With improving supplies, it could get filtered down to consumers. So it will take a considerable easing of prices across the board if inflation rates are to come down to more manageable levels.
The US Economy Spent More Than Any Other Country On The Pandemic Relief
The third stimulus check was a part of the American Rescue Plan Act signed by President Biden in March 2021. The massive support provided a host of relief measures covering almost every sector of the American economy and also its citizens. The $1.9 trillion support alone was larger than most countries’ annual economic output, almost as large as Italy’s and ahead of Brazil according to World Bank data. That was around 18.22% of the nation’s GDP.
And this was only the third of the relief measures. Just a couple of months before ARPA, the federal administration passed a $900 billion relief bill on top of over $2.5 trillion in aid that was authorized by the previous administration.
While low and moderate-income families and individuals received a generous stimulus check, the federal administration also set in motion a host of other measures. Money was pumped in to help businesses survive the pandemic and till the economy stabilized.
Educational institutions, hospitals, and other sectors were given generous support to help them stay operational before the situation normalized. Local and state governments also benefitted from the federal largesse.
Why Was The US Affected More During The Pandemic Despite The Stimulus Checks
The US was also one of the few major economic powers that offered cash payments as a response during the pandemic. In comparison, Japan gave out over $900 to all citizens in 2020 but did not commit to repeating the approach.
Most other large economies did not go along with cash payments and instead relied on pre-existing social safety nets.
Therein lay a part of the problem. While in Europe much of the money went out to people who needed it the most as the payments were not direct. With systems already in place, the administration could quickly trigger them and send out benefits to people.
But in the absence of any emergency relief measures in place in the US, the federal administration went for a direct stimulus check to citizens. But with a lack of vetting owing to the emergency nature of the support, in many cases, the stimulus checks went to a pretty broad section of the population.
One key difference that many European companies relied on was that it paid companies to retain the workforce. In the US, laid-off workers could seek bolstered benefits. The European theory was that their approach enabled them to keep the relationship between employer and employee intact.
These were some of the reasons that the US took the worst hit among all the major economies and contributed to the higher rate of inflation.
How Much Did Stimulus Checks Affect Inflation Rate
The direct money went out to a large section of the population who did not deserve the support and was gainfully employed throughout the pandemic. The stimulus check amount was a bonus for them and led to uncontrolled spending on non-essential products.
This led to a demand-supply gap as the economy was already unable to fulfill the demands of the economy due to the disruption in the transport sector and the absence of a large section of the workforce. This led to an increase in prices and contributed partly to the high rate of inflation.
A more careful appraisal of the section deserving the stimulus check could have led to a smaller budget and led to a less severe rise in inflation.
State Stimulus Checks And The Danger Of More Inflation
Economists and policymakers are divided on the effect the state stimulus checks could have on an already overheated economy. While there have been apprehensions cast on the infusion of more funds into the hands of citizens, they believe that the total is too small to have any effect.
The coming midterms have made matters worse as decisions taken in a political year invariably tend to be a mistake. Decisions are being taken more to keep the electorate in good humor than based on economic sanity.
But it is also undeniable that the US economy contracted significantly less than any other country, especially the other nations in the Group of Seven. It indicates that the size of last year’s stimulus check and other measures to boost the economy played a strong role in the faster recovery.
But the jury remains divided on its actual role in the high inflation rate. Most economists agree that at the most it led to a modest 2.5% to 3% increase in the total and other external factors were more likely to blame for the present economic situation.