Inflation Relief Payments: Experts Weigh In on Their Effects

The 2020 Stimulus check.
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The year 2022 delivered a one-two punch to a country still wobbly from the effects of the pandemic. The federal government cut off the stimulus payments that had gotten so many people through the crisis just as inflation began forcing prices up at the fastest rate since the early 1980s. 

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During the spring and summer, when gas prices reached record highs, several states responded by launching stimulus programs of their own. Most were much smaller in both the size of the checks and the scope of the eligible population.

In some states, like Idaho, it’s a welcome but relatively negligible sum like $75. In others, like California, New Mexico and Maine, payments of well over $1,000 are closer to the federal pandemic stimulus from COVID-19 times.

But with the Federal Reserve hiking interest rates in an attempt to stifle rising inflation, is it wise to inject the economy with new rounds of found money — and in the long run, are the payments even helping the people who receive them? 

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GOBankingRates asked the experts. 

The Benefit: Cash-Strapped Households Need, Well, Cash

The most obvious benefit of fresh stimulus, which many states are calling “inflation relief,” is also the most important — it gets desperately needed money to people facing financial stress. 

“There are a few different ways to think about this issue,” said Linda Chavez founder and CEO of Seniors Life Insurance Finder. “First, let’s consider the direct impact of these inflation relief checks on individuals. In general, when prices for goods and services rise through inflation, the purchasing power of each dollar decreases. This means that people need more money to buy the same number of items, or they can purchase fewer items with the same amount of money. If people are receiving extra money in the form of inflation relief checks, then they will be able to offset some of the impact of inflation on their purchasing power.”

But added stimulus also helps the businesses that are suffering because their customers can’t afford their rising prices or are having to cut back on buying things, in general. 

“There is also an indirect impact of these inflation relief checks on the economy,” Chavez said. “When people have more money to spend, they will likely purchase more goods and services. This increased demand can help businesses and boost economic activity. Additionally, the extra money may also lead to higher wages as businesses compete for workers.”

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The Drawback: More Stimulus Equals Greater Demand and Higher Inflation

Although inflationary pressures are complicated, the simple concept of supply and demand is at the heart of it all. Although it’s cold comfort for people who can no longer pay for the things they need to buy, their postponed purchases will reduce demand and, therefore, cause prices to drop. Injecting those households with cash now could have exactly the opposite effect. 

“The risk of sending out inflation relief checks is that it increases aggregate demand,” said Carter Seuthe, CEO of Credit Summit. “Especially because most people who receive these checks tend to spend the money they receive rather quickly. When aggregate demand goes up but supply is stagnant, prices generally rise. This means that inflationary pressure will just continue to increase.” 

Final Take: The Benefit to Struggling Households Outweighs the Economic Risk

Tom Brammar is the president and CEO of the financial wellness company Stackin’, a non-executive director of the emerging-market research firm GlobalSource Partners and an expert contributor to the Financial Times.

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In his view, the tradeoff between assisting those who need it and the potential inflationary consequences of new stimulus is an easy call.

“I think we can confidently say that receiving free money is almost always helpful to an individual irrespective of the wider economic situation,” Brammar said. “Sure, in certain circumstances, doing this on a large scale may cause inflation. But considering we pay an awful lot of money to individuals whose sole job it is to look after this, I say take the money and worry about maximizing it, rather than harboring any guilt about its effects on the wider economy.”

Also, many of the arguments levied against the federal pandemic-era stimulus payments simply don’t apply to the current state initiatives. For example, Pew points out that most states are funding their stimulus programs with revenue surpluses, not through debt-inducing borrowing. But the most stubborn criticism of direct cash payments is that those who need help are lazy and stimulus will only make them lazier.

“The idea that this creates unrealistic expectations is rooted in the mistaken belief that the majority of individuals would happily live off handouts rather than working to provide for themselves or their families,” Brammar said. “We’ve had 50 years of capital trouncing labor. Maybe it’s time to redress that balance a little?” 

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.
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