By Aman Jain. Originally published at ValueWalk.
Congress has sent three rounds of stimulus checks since the start of the COVID-19 pandemic in 2020. The first round was $1,200, while the second and third rounds were $600 and $1,400, respectively. Though the U.S. has used stimulus checks before as well, particularly during the Financial Crisis of 2008, the size and scope of stimulus checks this time were unprecedented. Thus, many argue that giving too much money to households is responsible for the rise in general price levels, or that indirectly stimulus checks caused inflation. On the other hand, there are some who believe that stimulus checks were effective in helping people and that the current inflation is due to supply-side factors.
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How Would Stimulus Checks Cause Inflation?
Congress was quick to come up with the massive stimulus package within weeks of the first lockdown in 2020. Since sending quick relief was the priority with the first relief payments there were a few glitches as well, such as money sent to deceased Americans.
Many also argued that the stimulus money could have been more targeted. It is believed that about 90% of taxpayers received stimulus money whether or not they witnessed financial hardship due to the COVID-19 pandemic. The third round of stimulus checks, however, was comparatively more targeted than the first two rounds.
Additionally, as Congress progressed from sending the first stimulus check to the second and then eventually to the third, a drop was seen in the number of people actually spending the stimulus money on what they were expected to spend it on.
Most households used the first stimulus checks on household spending, but many people saved the money they got in the second and third round or used it to pay down debt. One major reason why the money in the last two rounds, especially the third one, was used for other purposes is that the economy was in a recovery phase by that time.
Thus, many argue that this left extra money at people’s disposal, and it eventually pushed inflation up.
“There’s inflation across the board, and the U.S. is experiencing kind of a uniquely higher inflation,” said Erica York, senior economist and research manager at the Tax Foundation, according to CNBC. “I think it’s driven by not just the stimulus payments themselves, but the size of the relief overall.”
Supply-Side Issues Pushing Inflation Up
On the other hand, many don’t believe the argument that stimulus checks caused inflation. Rather, they see the supply-side issues as the culprit. These supply-side issues include a shortage of workers due to the pandemic, constraints on international movement of goods and the Russia-Ukraine war.
Both sides have valid points on whether or not the stimulus checks caused inflation. To say that stimulus checks have no role or is completely responsible for inflation would be wrong. We could, however, say that stimulus checks are partly responsible for the current inflation.
The Federal Reserve Bank of San Francisco even quantified the stimulus check’s role in fueling inflation. It is estimated that at the end of March, the stimulus money may have added three percentage points to the national inflation rate.
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