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Inflation: ‘Stimulus checks caused the problem,’ American Action Forum president says

American Action Forum President Douglas Holtz-Eakin joins Yahoo Finance Live to discuss how pandemic stimulus contributed to inflation, the Fed's rate hike strategy to alleviate inflation, and how Americans are dipping into savings to balance rising gas and food prices.

Video Transcript


- Welcome back. Persistently high inflation has some states like California sending checks to residents to help them fight soaring prices. But some say this could make inflation even worse. And joining us now is Douglas Holtz-Eakin, American Action Forum President.

And Douglas, I get both sides of the argument here. We got in this predicament with inflation, putatively because of fiscal stimulus and monetary stimulus. But this $1,050, or whatever it is that California is targeting some of those lower income folks, so I'm just wondering where your organization falls on this very divisive issue.

DOUGLAS HOLTZ-EAKIN: Well certainly I am convinced that the American Rescue Plan, the $1.3 trillion stimulus in March of 2021, really kicked off the push to higher inflation in the United States. You can look at consumer price inflation in Europe versus the US. Both of them share the global supply chain problems, and so the inflation from that should be roughly the same.

And in the first quarter of 2021 Europe's at 0, the US is at about 1.4. Europe goes up about 1 percentage point every quarter in 2021. The US goes up 3 times that in the second quarter, right after the checks go out, and then it continues to go higher.

So I don't think it's too complicated to say that massive checks really kicked off this big inflation problem, and now the states are getting into the game. Now California's sending checks one time is nothing like the federal government's effort, but it really won't do anything to solve the problem, which is inflation. What it does is temporarily disguise the inflation problem and hope maybe the Fed and other efforts can solve it in the interim.

I at least think the states ought to look at some of the things they can do to affect their cost of living. They have taxes. They have regulations. They deeply affect the cost of housing, which is a third of the CPI. And they might want to look close to home with things they can do to take some of the price pressure out and not just disguise it with checks.

- And we did see that most of those individual stimulus checks-- most of those rolled out December of 2020 and March of 2021-- we are over a year away from that period. Do we still think that those elements of those stimulus checks are still being filtered in and impacting inflation right now?

DOUGLAS HOLTZ-EAKIN: I think they were more responsible for kicking it off than really providing a big push at the moment. A lot of it did get saved. You've seen calculations that center around $2 and 1/2 trillion in excess savings that came into this year, and some of that is the stimulus checks. So it helps sustain the demand in 2022 and thus sustain some of the inflationary pressures.

The Fed is leaning against that. As time goes on they become less and less significant, from the inflation point of view. But they did engender a sharp rise in inflation expectations, and now this is the number one threat to the Fed's hope for a soft landing.

If you go back to the inflation of the '70s and early '80s, it was persistently high expectations of double digit inflation that ultimately drove the Volcker Fed to set the funds rate at 19% in order to break inflation. This Fed wants to avoid pushing its rate up any higher than it has to, and getting inflation expectations under control is the key to that.

- And we've had higher savings rates over the last year, maybe two years even. But now I'm seeing reports that some of that savings is being dipped into to cover higher costs because of price inflation. And I've also seen all these reports that cash on the sidelines is good for the stock market, but it can't be good if it's being used to purchase everyday household items.

DOUGLAS HOLTZ-EAKIN: Well this is the problem with inflation. It hits everybody, and not everyone is comparably prepared to deal with the inflation. So we worry the most about seniors, seniors on fixed incomes. They face a big inflation problem, like everyone else.

The Bureau of Labor statistics actually calculates a research CPI dedicated to the elderly, and their inflation rate went from about 1.4% in January of 2021 up to 8% most recently. So they're facing the same inflation problem everyone else is, and that means every dollar they had in their pension, their savings is worth nearly 10% less this year than it was last year. And that's a big blow with no offsetting income elsewhere.

So I think we are seeing people dip into any extra savings that they did have to cover the additional costs of especially the necessities. I think it's not really widely appreciated that food, shelter, and energy are about 50% of the family budget. Those are necessities.

And the year over year inflation rate in those necessity categories is over 11%. So it's worse than the top line. We're seeing seniors and other households having to cover that cost, and they're using their savings to do it.

- And we know that there's been a lot of finger pointing about what's contributed to inflation and solutions, what's working, what's not. At this point, though, what do you think are the most important things both policy-wise and otherwise, perhaps things that Congress could do, to really actually make the biggest difference for the American consumer right now?

DOUGLAS HOLTZ-EAKIN: I think the biggest difference will come out of efforts by the Federal Reserve to aggressively move rates from far, far, far too accommodative to restrictive. The minutes that the Fed released today said they needed to do as a matter of meeting their mandate. They intend to do that. They're going to trim back the portfolio, which will have further implications for financial tightening. That's the main fight against inflation.

There are things, for example, that the administration could do. I have been surprised they have not moved to drop some of the tariffs on China that would have a one-time effect but it would be a beneficial effect, and I think people would genuinely appreciate that.

It's also true that they've continued to impose pretty heavy regulatory burden. They put about $200 billion in regulatory costs onto private businesses in the first year in office. That's way more than the Obama administration, which averaged about $110 billion a year. So all those costs, they get passed forward in inflation, and any place they can relieve them, they probably should.