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The Effect of Stimulus Checks on Inflation & the Overall Economy

LPETTET / Getty Images/iStockphoto
LPETTET / Getty Images/iStockphoto

The U.S. government authorized and administered a series of stimulus payments to both individuals and businesses to help sustain the U.S. economy in 2020 and 2021. Though the full effects of these payments has yet to be determined, there’s no doubt that both the recovery of the economy and the current spike in inflation were affected in some way by these payments. Here’s a look at what the data suggests regarding the ramifications of the U.S. stimulus packages.

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How Much Stimulus Was Distributed?

In 2020 and 2021, there were three rounds of personal stimulus payments that distributed a total of $3,200 to qualifying adults and $2,500 per eligible child. The total amount paid to individuals in the form of stimulus checks was about $391 billion. Businesses were also offered financial support, with Congress distributing more than $780 billion during two rounds of the Paycheck Protection Program. The PPP program was technically structured as a loan, but businesses could apply for forgiveness if the payments were used for qualifying expenses, such as payroll.

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What Effect Did the Stimulus Have on the Economy?

When the coronavirus pandemic struck the U.S. economy in early 2020, the effects were swift and devastating. Nonfarm payrolls dropped a staggering 22.1 million jobs between January and April 2020, while the unemployment rate skyrocketed from 3.5% in February 2020 to 14.8% in April, the highest rate ever recorded since data collection began in 1948.

The stimulus payments enacted in response to this crisis helped the U.S. economy avoid even greater damage. According to the Congressional Research Service, stimulus payments may have enhanced consumer spending, which in turn helped businesses remain solvent. After the sharp peak in April 2020, unemployment immediately began falling steadily, dropping to 5.8% by May 2021.

See: Are You Missing Out on Free Money? 80% of Americans Aren’t Taking Advantage of COVID Relief

What Effect Did the Stimulus Have on Inflation?

Based on the data, the stimulus payments provided a needed backdrop for a foundering economy. However, now that vaccinations are widespread and COVID-19 case counts have been dropping rapidly, the U.S. economy is in full expansion mode. According to the U.S. Bureau of Economic Analysis, real gross domestic product shot up 6.4% in the first quarter of 2021. Coincidentally, as of May 2021, the U.S. Bureau of Labor Statistics reported that the consumer price index rose 5.0% over the prior 12 months, the highest rate since 2008.

The Ups and Downs: What Is Inflation and What Does It Mean When It Goes Up or Down?

Economics is a tricky thing, so it’s hard to say that all of that stimulus directly created the current spike in inflation. According to The Washington Post, for example, some of that inflation can be just a numbers aberration, as one year ago the economy was mostly shut down and prices were falling, especially for industries like travel and leisure. The chairman of the Federal Reserve, Jerome Powell, has said that the current spike in inflation is merely transitory, a reflection of short-term supply bottlenecks in addition to low comparisons from one year ago. Yet, there’s no doubt that the excess money flooding into the economy has had at least some effect on pushing prices higher in 2021.

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Last updated: July 6, 2021

This article originally appeared on GOBankingRates.com: The Effect of Stimulus Checks on Inflation & the Overall Economy