Dems’ stimulus plan unlikely to have long-term impact on inflation
The $1.9 trillion coronavirus relief package President Biden signed into law earlier this year is likely driving inflation down, according to new research published this week by the Federal Reserve Bank of San Francisco.
Latest Analysis It comes amid a raging debate on Capitol Hill whether the spending package – which Democrats passed without a single Republican vote – is to blame for the wild jump in consumer prices.
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Critics say the plan, which included a third round of $1,400 stimulus checks, boosted unemployment benefits and a one-year extension of the child tax credit, flooded homes with poorly targeted cash and overheated the economy. Advocates say the law has provided significant relief to families and small businesses.
The San Francisco Fed paper found that the US rescue plan played a role in contributing to the rise in inflation, but concluded that the nearly $2 trillion plan would ultimately have a modest long-term impact on that. Economists predict the plan will add 0.3 percentage points to the Fed’s preferred inflation gauge (known as the personal consumption expenditure inflation index) in 2021 and “slightly more” by 0.2 percentage points in 2022.
“The impact in 2023 is negligible and is not shown in the figure,” the newspaper said. “Thus, the estimated effect of ARP on inflation is meaningful, but it is still far from the extremes of the 1960s.”
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To determine the impact of the stimulus bill on the economy, Fed economists looked at a metric in the labor market known as the vacancy-to-unemployment ratio. The thinking is that inflation will be higher when this measure increases, as businesses will be forced to increase wages to attract new workers – and then later increase the price of their goods to offset labor costs. Will be
The researchers concluded that, based on the size of the spending package and historical evidence of how fiscal stimulus affects the labor market, the US rescue plan could push the vacancy-to-unemployment ratio near its historic peak in 1968, Which can be “temporary”. increase in inflation”.
“This modest effect is due to the small effect of the slowdown on inflation and the strong historical stability of long-run inflation expectations,” the economists wrote.
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Jerome PowellThe president of the US central bank has largely attributed the rise in consumer prices to pandemic-induced disruptions in the supply chain, staff This has pushed up wages and consumers are flooded with incentives.
Powell maintains that the increase in inflation is likely to be “temporary” and warned about the dangers of the Federal Reserve acting unnecessarily to lower the benchmark federal funds rate.
The Fed adopted a new strategy last summer in which to reach maximum employment, it would keep the benchmark federal funds rate near zero even if inflation rises above its preferred 2% rate. But over the past few months, inflation has been rising at the fastest pace in more than a decade and well above the Fed’s preferred target of 2%. In August, the gauge rose 4.3%, a 30-year high.