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Will Inflation Stimulus Checks Make Inflation Better Or Worse?

According to data from the U.S. Bureau of Labor Statistics, inflation numbers hit 8.6% as of May 2022. This means that, over the span of 12 months from May 2021 to earlier this year, the price of everyday goods and things like energy and medical care increased at a rate that hasn’t been seen in the last 40 years.

You know this already, and you’re probably feeling it in every direction right about now. Where many of us are still recovering financially from the pandemic in one way or another, we’re also paying more than ever to fuel up our cars and fill our pantries with food and supplies. This also comes at a time when a bear market seems imminent, and when many retirement savers and investors have seen the value of their assets drop by 20%.

Crazy enough, some government officials think the answer to this inflation is throwing more money at it. In fact, several states are doling out some form of “inflation relief” to their residents, either in the form of an inflation stimulus check or a relief rebate on state taxes.

Examples of states getting on board with this idea (or trying to) include California, Colorado, Delaware, Georgia, Hawaii, Idaho, Indiana, Kansas, Kentucky, Maine, New Mexico, and Virginia. Note that the idea is still being debated in many of these states, so you’ll have to stay tuned to find out which ones make inflation relief checks a reality.

I reached out to an array of economic experts to find out if inflation stimulus checks are a good idea, and under what circumstances if so. If you want to know what experts from Stanford, Maryville University, and the American Institute for Economic Research (AIER) think about this idea, read on to find out.

Inflation Checks May Artificially Increase Demand

Nicholas B. Creel, who serves as Assistant Professor of Business Law at Georgia College and State University, says that much of today’s inflation is being driven by supply chain issues and fuel prices. With that in mind, the risk in sending out stimulus checks is that it increases aggregate demand, especially since most people spend the money they receive rather quickly.

“When aggregate demand goes up, but supply remains stagnant, prices generally rise as a result meaning it further increases inflationary pressure in an economy,” says Creel.

That said, Creel is not entirely convinced that stimulus checks will make inflation much worse than it is right now.

“In fact, it could well help ease the burden of this inflation on poor and middle class families whose budgets are being most impacted right now by these price spikes,” he says.

Getting Americans Hooked On Free Money

Tim Rosenberger, who is a Stanford JD/MBA and Hoover Institution Rising Fellow, says that the timing of these inflation stimulus checks, including the fact they follow on the heels of various pandemic stimulus programs, poses a specific type of risk. Namely, “individuals and families may postpone attending to difficult economic realities, instead using these checks to meet basic needs.”

In other words, this can create a trend where consumers are waiting for stimulus checks to pay for food and utilities instead of using the funds to pay down debt or build up emergency funds. Rosenberger adds that, if more stimulus doesn’t follow, and a severe recession occurs, these families could face abrupt economic hardships.

Rosenberger also adds that, in Northern Virginia and California especially, stimulus checks may wind up being used to pay for overpriced housing in surging markets.

Consumers may not actually be able to maintain housing at these prices long-term without stimulus, he says, which could mean they’re even worse off several months from now.

Stimulus Checks Exacerbate Supply Chain Issues

Jonathan Wolff, who serves as Professor of Economics at the Farmer School of Business at Miami University in Ohio, says that stimulus checks are most effective in general when demand is weak. He adds that, while that might be the situation we find ourselves in soon, it’s not the case right now.

As a result, any inflation stimulus checks that go out right now may just help maintain already high demand at a time when supply is constrained.

“They will be very inflationary, he says, adding that households that receive the checks will likely wind up paying so much more for goods that the inflationary impact outweighs any benefit of the stimulus.

Stimulus Checks Could Worsen The Labor Shortage

Dr. Jaime Peters, who serves as the Assistant Dean and Assistant Professor of Finance at Maryville University, says that stimulus inflation checks basically reinforce the two reasons inflation is occurring in the first place.

“New stimulus checks will improve people’s feeling of wealth and increase the money chasing the few goods,” she says. “Additionally, a new round of stimulus checks may result in people being able to avoid returning to work for a few more months, which would reinforce the labor shortage – resulting in continued supply side shortages.”

Inflation Checks Set A Precedent

Economist Peter C. Earle, who works for the American Institute for Economic Research (AIER), agrees that sending out checks in states with a large population could exacerbate inflationary pressures by driving up demand of consumer goods. Second, he says, policies like this never end with a period. Instead, they may wind up taking on a life of their own.

They end “with an ellipsis,” says Earle. “Without knowing what path inflation will take over the coming months, and in particular with elections coming, a one-time inflation relief check could easily become a perennial policy measure.”

What Should Governments Do Instead?

All the experts I spoke with agreed that inflation stimulus checks or rebates could come with unexpected consequences, or even expected consequences like continued inflation until supply can keep up with demand.

Professor Chester Spatt of Carnegie Mellon University says that, instead of printing more checks to stifle the temporary impacts of inflation, governments should be taking steps to reduce demand and increase supply.

“Such steps would reduce the extent of price increases and bring about better balance between demand and supply,” he says.

Earle adds that governments should ensure that their relief efforts don’t “counteract or undermine contractionary monetary policy measures.” Further, they should avoid enacting measures like price and wage controls since these moves inevitably create shortages of goods and services while stifling employment and output.

Wolff also says that state governments should look for ways to increase production. An example of one action to take includes temporarily reducing business taxes in order to make local businesses more competitive with their foreign competition.

“Give people a stronger incentive to work, and remove the disincentives to stay on the sidelines,” he says. “Governments can do this by temporarily reducing income taxes and ending Covid era stimulus programs like eviction moratoriums and student loan forbearance.”