Here's a chart of PCE core inflation since 2021:
The dashed red line is three months after the American Rescue Plan was passed. This is the absolute earliest it could have affected inflation, and by then the inflation rate had already spiked from 2% to 7%. It's really not plausible that ARP could have caused this.
But did it cause the brief rebound in inflation later in the year? It's possible. But it's more likely that the bulk of the inflationary pressure came from product shortages, as you can see from the very close association between inflation and supply chain pressure. Mike Konczal confirms this in an analysis here. Spending from the various stimulus plans probably had an effect, but not a big one.
"...This is the absolute earliest it could have affected inflation ..."
How are you figuring that? The checks started going out on March 12.
The chart uses a 3 month rolling avg for inflation.
March 12 + 3 months.
"The chart uses a 3 month rolling avg for inflation."
In which case a change will start to appear with the first new data included which will be within one month.
Maybe, but certainly not to a degree that is noticeable.
320 billion distributed in the second half of March. More in April (I still havent received mine, lol).
Given that we saw large increases in bank balances, we know much of it wasnt spent right away.
You can make up whatever you want to be argumentative, but theres no reason to think the stimulus had a noticeble impact right away.
It's amusing to see you argue that an infusion of over a trillion dollars into the economy unlikely affected inflation. If that's the case, then we can have our cake and eat it too -- I'm full, but more stimulus, please!
As I pointed out here last week, if you look at M2 money velocity -- the rate at which a dollar circulates through the economy as it's spent -- we don't see any significant uptick following the stimulus. Real demand-side inflation would show up in the money velocity stats and it's just not there. This was because of labor and supply-chain disruptions.
I never said that those things weren't true.
I was the one who early on pointed out the direction M2 money supply indicating the stimulus bill should have been targeted to lower-income people.
But macro is pretty clear that stimulus does stimulate the economy and direct cash payments have high fiscal multipliers. It has to create at least some modest inflation, otherwise the point of the exercise is worthless and we shouldn't ever do stimulus again.
So like I said, you can't have your cake and eat it too.
The stimulus was to compensate for loss of income because of layoffs and unemployment. That loss of income would tend to cause deflation. So what was the net of income loss and stimulus?
Whether the stimulus increased the inflation is a kind of secondary question although further spending could have some effect. All the evidence indicates that the major inflation which started in 2021 was primarily caused by supply shortages, and it came down in 2022 when those shortages eased.
It's not a secondary question. That it avoided deflation is key to pointing out that it, in fact, acted to boost prices.
I have been on here from the start saying the bulk of inflation was caused by exogenous events. I have also been on here from the start saying that the stimulus could have been targeted.
Perfect should always be the enemy of good?
Monday morning QB'ing is even easier when you have nothing at stake.
Did not say nor implied that.
I made my argument before the stimulus was passed. That's not MMQB. My comment is right there in KD's post in MJ, previously linked to, by Rick_Jones.
Spending from the various stimulus plans probably had an effect, but not a big one.
This seems a breezy assertion, and frankly isn't consistent with the transitory thesis (of which I've come around to agree with more and more).
Normally when we get a drop in GDP because of recession—in other words a decline in the output of goods and services being produced, and available for purchase—we likewise see a drop in income. So there's no imbalance between goods and money. In other words we don't enter a situation where there's too much money chasing too few goods and services.
But in early 2020 the government ordered a decline in output because of the public health emergency, which translated into fewer goods and (especially) services available for purchase. But there was no commensurate drop in income as is usually the case, because of stimulus. I think erring on the side of caution was justified. But err we did. Hence too few goods and services for the amount of purchasing power available.
I think it's likely stimulus played a significant role. Had the government not provided that tsunami of cash, we'd have had a punishing recession; we would not have had inflation.
I think this is right. The stimulus effectively offset the massive contraction caused by the pandemic and we ended up pretty much even-steven in a macroeconomic sense, avoiding what could have been a catastrophic recession or depression. What was harder to control, of course, were all the ways the pandemic messed with labor and supply chains across the globe.
People forget -- post-pandemic inflation was *global*, not just in the US. If you're going to blame the ARP for inflation, then you have to explain how it also affected England, Germany, India, etc.
You can make two arguments from the same set of facts.
Facts:
There was no surge in demand
There was a decline in supply/production
There was inflation
Argument 1: Given that there was no surge in demand, the decline in supply is the cause of inflation.
Argument 2: Sure, maybe the decline in supply caused inflation, but if there had been a decline in demand along with the decline in supply there would have been no inflation. The lack of a drop in demand is to blame!
Meh. Argument 2 is convoluted and misleading...but not necessarily wrong.
No, I think that's a perfectly reasonable way of stating it.
Of course a drop in demand necessary to counteract the supply-side inflation would have meant a crushing recession or depression, sky-high unemployment, mass immiseration, etc. But hey! Eggs are still cheap!
nah, its definitely misleading.
Statements like Jasper's "normally when we get a drop in GDP" is misleading because there is no perfectly normal, textbook recession and literally nobody knows how to predict recessions, output, inflation, etc. He just made things up and framed it as 'normal'.
He directly states that the contraction in production is to blame but then re-explains that ACTUALLY something else is to blame.
Guns are a major cause of death, but no, ACTUALLY choosing to be in the path of the bullet is a major cause of death! Perfectly reasonable.
Drunk driving is dangerous, but no, ACTUALLY, its the trees/fences/other cars that are dangerous!! Perfectly reasonable!
Statements like Jasper's "normally when we get a drop in GDP" is misleading because there is no perfectly normal, textbook recession
Respectfully, you haven't grasped my point, which definitely does not require that all recessions be identical. They're obviously not, and have different causes. However, what they all share in common—until the brief but dramatic one we experienced in the spring of 2020—is a drop in both economic output and income.
It's this last bit that made the 2020 recession different: we saw a drop in the output of goods and (especially) services, but not a commensurate drop in income (we may even have seen an increase, on net, given the significant bumps for lower income households courtesy of the massive stimulus).
So, we experienced a mechanical increase in the ratio of purchasing power (which was juiced by the government) to output (which was slashed by government fiat).
In other words more demand relative to supply. Hence inflation (more or at least equal money chasing fewer goods/services). For all intents and purposes, the government (inadvertently, of course) mandated that the economy go into inflation mode. That'll tend to happen when you order a decrease in output relative to income (demand).
Several countries, such as South Korea, did not experience high inflation during the same period. South Korea has less domestic production and consumption/is more exposed to the global supply chain when compared to the US. While smaller, South Korea had domestic stimulus associated with Covid.
My point, if US inflation was really JUST global supply chain challenges, then peer OECD countries would presumably have similar impacts. Given that the aforementioned didn't happen in Asia (Japan, South Korea, Singapore etc ) then I suspect domestic policy, such as the US stimulus, must play a significant role...
I decided to check the value of the South Korea won the last five years and it has gotten 20% cheaper versus the dollar. What this means is that South Korean imports to that country are more expensive. A lot probably has to do with oil prices. Without knowing more about their economy (oil tax and subsidy, commodity reliance, tariffs, export licensing), it is hard to say how the word economy affected them.
Raoul - South Korea imports virtually all (98%) of its oil. South Korea is the world's seventh largest exporter of goods and the tenth largest importer. Hard to see how South Korea is not massively impacted by global trade disruptions....
Also, in the case of South Korea, not sure how relative currency variations ("South Korea won the last five years and it has gotten 20% cheaper versus the dollar.") play into the question 'did US stimulus cause domestic inflation?'
Quick google search indicates that South Korea had very high inflation in 2022.
So this analysis appears to be completely wrong.
Is this adjusted for inflation?