Topline
Amid heated debate in Washington, D.C., over whether government spending is fueling a rise in inflation, new research from the Federal Reserve Bank of San Francisco suggests that the Biden Administration’s latest stimulus package is contributing to a spike in prices.
A regional Fed analysis argued that Biden’s stimulus package is boosting near-term inflation.
Key Facts
According to a report from the San Francisco Fed on Monday, the “later timing and large size” of the American Rescue Plan—the latest stimulus package, passed in March—has fueled debate over whether it is overheating the economy and fueling a sustained increase in inflation.
By the time the latest rescue plan was passed, the report points out, the economy had “at least partially recovered from the pandemic” and was in the midst of a “strong” rebound.
The San Francisco Fed assessed the state of the labor market by analyzing the ratio of job openings to unemployment, finding that the Biden Administration’s latest fiscal plan has temporarily raised that metric.
That in turn will push up inflation in the short term, by around 0.3% per year through 2022, the report concluded.
The latest relief package therefore has had some effect on inflation, according to the San Francisco Fed, but the authors suggest that it will only be temporary.
Crucial Quote
“Our analysis suggests that the American Rescue Plan is projected to cause a transitory increase in the vacancy-to-unemployment ratio, which translates into a core inflation rate that is about 0.3 percentage point higher per year through 2022.”
Key Background
In a bid to stabilize the U.S. economy through pandemic disruptions, both the Trump and Biden administrations signed trillions of dollars of virus relief spending into law, including the $2.2 trillion CARES Act in March 2020 and $900 billion of additional relief in December. Government efforts to stabilize the U.S. economy continued into 2021: The $1.9 trillion American Rescue Plan, passed in March, aimed to provide critical aid to workers and businesses still dealing with the effects of the pandemic.
Chief Critic
Those who were against the latest government spending package continue to warn of overheating the economy. “There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation,” Former Treasury Secretary Larry Summers argued in an op-ed last February.
