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Are stimulus checks causing inflation in the United States?

After a recession or economic disruption economies normally experience a period of higher inflation, but are the stimulus checks to blame in this case?

Update:
After a recession or economic disruption economies normally experience a period of higher inflation, but are the stimulus checks to blame in this case?
Dado RuvicREUTERS

The reasons behind the US economy running hotter than normal are varied, but mainly it comes down to the disruptions caused by the covid-19 pandemic. The stimulus programs implemented during the pandemic which kept many households afloat played their part too, but not as much as critics are claiming.

The US Congress has approved almost $6 trillion to help the US economy and American households get through the pandemic. Of that amount, over $900 billion went to Americans as three separate Economic Impact Payments, or better known as stimulus checks.

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Are stimulus check behind inflation?

A debate has been raging about just how much stimulus checks are to blame for the extended high inflation in the US. Critics of President Biden latched on to his words when he addressed tackling inflation with his Build Back Better plan and by improving US infrastructure at the Port of Baltimore in November. His remarks were said to be an admission that the $1,400 stimulus checks approved in the American Rescue Plan were responsible for a spike in inflation.

During the speech Biden talked about the supply chain issues the US has been experiencing in part because of inefficient infrastructure due to a lack of investment over decades. Addressing the disruption caused by the covid-19 pandemic and climate disasters, Biden said they have “a ripple effect” which end up “driving up prices here in America.”

Biden went on to say “The irony is people have more money now because of the first major piece of legislation I passed. You all got checks for $1,400.”

“If there’s nothing to buy and you got more money? You compete for getting it there. It creates a real problem,” he added. “What happens? Prices go up.”

How much are stimulus checks affecting inflation?

The effect of stimulus checks on inflation hasn’t been individually parsed out. They were part of numerous covid-19 relief measures like enhanced pandemic unemployment benefits, the enhanced Child Tax Credit with its advance payment scheme, Paycheck Protection Program and more. These have injected trillions of dollars into the economy, the American Rescue Plan (ARP) alone approved $1.9 trillion in covid-19 relief and stimulus.

The Federal Reserve Bank of San Francisco looked at the effect of the American Rescue Plan specifically on inflation. It found that Biden’s stimulus is temporarily ratcheting up inflation, but not causing “overheating” as has been suggested. Their analysis found that “the ARP, is expected to cause inflation to increase by about 0.3 percentage point in 2021 and by a bit more than 0.2 percentage point in 2022. The impact in 2023 is negligible.”

No fourth stimulus check on the horizon

The last round of stimulus checks was approved in March 2021 and most of the payments went out before the summer. Shortly after the first direct payments were sent, 6 out of 10 respondents to a Bankrate survey said those $1,400 checks wouldn’t last them a full three months. That statistic was cited as a reason to pass a fourth or even recurring stimulus checks by advocates in Congress. Despite continued calls from the public and organizations, lawmakers have ceased to moot such a plan.

Democrats are more focused on getting the Build Back Better Act through the Senate where it has languished since November. Included in the sweeping social and climate policy legislation is one measure that could bring additional direct payments to households with children. The ARP enhanced the Child Tax Credit for the 2021 fiscal year, but those changes have expired with the failure to pass the Build Back Better Act before the end of the year.

The 2021 Child Tax Credit began sending parents monthly instalments on the expanded tax credit in July. Studies in the months after the first payments hit bank accounts showed the helped American families still struggling. Most Americans used the monthly boost to their finances to cover essentials or pay down debt.

Extending the tax provision is one of the key measures Democrats would like to get through Congress but it has encountered opposition from Senator Joe Manchin. Democrats are looking at ways they could pare down the enhancements or put eligibility limits that would satisfy Manchin’s concerns but no agreement has been reached yet.

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