Over a dozen states have moved in with their version of the stimulus check to fill the gap created by the federal administration. With inflation remaining at record levels, prices of gasoline, other essential commodities, and utilities continue to rise. The federal administration is stuck in a gridlock with the opposition and is concentrating more on rebuilding the run-down infrastructure of the nation.
The federal stimulus checks are being held responsible at least partially for inflation, particularly the third stimulus check. But the federal administration has pointed to the supply and production and supply logjam that created a shortfall of all goods and which will take time to normalize.
The war in Europe has complicated the matter further and could worsen as America refuses to back out of a military presence in Europe.
Was the stimulus check the only cause of the price rise?
Were the stimulus checks responsible for the spike in prices? Some political voices would have us believe that it was the only reason for the woes of America today. Economists generally agree that there is no one single cause that led to a rise in prices. The San Francisco Reserve Bank has estimated that by end-March, the stimulus checks could have increased the American inflation rate by 3 percentage points.
Economists agree on several reasons that led to the high rate of inflation which has come to define the US economy for the past several months.
One major cause was that the pandemic caused a shift in consumer demands toward goods and away from services. This sudden rise in demand left producers and manufacturers unable to meet the demand. This was further hampered due to the supply chain breakdown during and after the pandemic.
Factories remained closed during and after the pandemic. Even after they opened, getting workers to the factories proved tough immediately after the lockdown phase. So even as demand went up, the production and supply phase was being hit due to the pandemic.
Oil prices determine the price of all products and services and the war in Europe caused a rise in prices. Sanctions against Russia, the third-largest producer in the world, backfired and have harmed the nation that imposed the sanction more. It increased the price of both shipping and manufacturing and also forced up the prices of food and other essential commodities.
The US also continued to deal with an acute shortage of labor. It left many businesses shut for months as they were unable to resume production despite rising market demand.
Other Nations Did Not Give Stimulus Checks Or Other Relief As The US
One argument is that people who blamed the stimulus checks for inflation have used two indisputable facts.
No nation distributed so much stimulus to its citizens as America and consequently, no nation suffered as high an inflation rate, especially in the developed world.
But it is also not true that high inflation is limited to the US. Even nations that have been comparatively passive and conservative in their approach to the economic situation are in the grip of high inflation but not on the scale suffered by the US.
The inflation rate in the European Union has hit 7.5%, not much below the rate in America. They did not rely on the stimulus checks on the scale of the US.
The Stimulus Checks Did Cause A Rise In Inflation
The huge cash injection into the US economy did have its influence on the economy. As the money supply grew too big compared to the size of the economy, the unit currency value diminished. Thus, the purchasing power of the dollar fell the prices naturally rose as a result.
But it is also true that supply shocks like the pandemic which disrupted the production processes raised the cost of production. Reduced supply of raw materials, high oil prices, and unavailability of workers reduced overall supply and led to a mismatch in supply and demand.
The US faced both post-pandemic. The massive stimulus payments led to a massive increase in the quantity of money flowing directly into the economy. It caused demands to soar even as the supply shock and labor shortage disrupted the shipping and production processes.
Another cause was that the stimulus check amount reached people who did not deserve it. A considerable part of the stimulus check, particularly the third stimulus check, went to individuals and families who had a steady income and did not merit it. This led to a spurt in spending on non-essential goods and spiked up demands at a crucial time.
States Send Stimulus Checks To Counter Inflation
Several states have already moved ahead with legislative measures to send stimulus checks to their residents. The latest announcement has come from California, which had so far indicated that it would go for gas cards with $400 instead of directly sending stimulus checks.
But in a reversal, the state has decided to give direct financial relief to its residents. Governor Gavin Newsom and legislators in the state have agreed to plans that could send direct payments of up to $1,050 to families in California.
Around 23 M residents could benefit from the move, which is more than half the number of the state’s residents.
The joint statement released by the assembly leaders of the state and the Governor said that the budget proposal would address the most pressing needs of the residents of California. They said it would prioritize giving money back to the millions of residents who continue to grapple with the negative effects of global inflation. This had hiked the prices of every product from gasoline to groceries.
This announcement marks a shift in the policy of Governor Gavin Newsom’s previous plans for the gas and transit cards for residents which proposed a smaller amount.
Once passed, the stimulus check announced by Governor Newsom is expected to be issued by the Tax Board of the state, the CFTB. It will be through debit cards and direct deposits into beneficiaries’ accounts. Payments are expected to start in October and would continue into early 2023.
The proposed $17B packages announced by California will include other measures to help provide relief that includes a suspension of tax on diesel by the state and also on utility costs and rent.