Coronavirus relief package likely to spark inflation

A $1.9 trillion coronavirus relief package that President Biden signed into law earlier this year is likely to spark inflation, according to new research published by the Federal Reserve Bank of San Francisco this week.

The latest analysis comes amid a furious debate on Capitol Hill over whether the spending package passed without a single Republican vote is responsible for wild surges in consumer prices.

Critics say the plan, which included a third round of $1,400 stimulus checks, boosted unemployment benefits and a one-year expansion of the child tax credit, flooded households with poorly targeted cash and overheated the economy. Advocates say the legislation provided critical relief to families and small businesses.

The San Francisco Fed paper found that the American Rescue Plan played a role in contributing to the inflation spike, but concluded that the nearly $2 trillion plan will ultimately have a modest long-term effect on it. The economists estimated the plan would add 0.3 percentage points to the Fed's preferred inflation gauge known as the Personal Consumption Expenditures inflation index in 2021 and a bit more than 0.2 percentage points in 2022.

The impact in 2023 is negligible and is not shown in the figure, the paper said. The estimated impact of the ARP on inflation is therefore significant, but it is still a far cry from the strong overheating of the 1960 s. To determine the stimulus bill's effect on the economy, the Fed economists looked at a metric in the labor market known as the vacancy-to-employment ratio. The thinking is that inflation will be high when this measurement rises, because businesses will be forced to raise wages in order to attract new workers and then subsequently increase the price of their goods to offset the labor costs.

The researchers concluded that, based on the size of the spending package and historical evidence of how fiscal stimulus affects the labor market, the American Rescue Plan could push the vacancy-to-employment ratio near its historical peak in 1968, likely causing a temporary increase in inflation.

This minor impact is attributable to the small effect of slack on inflation and the strong historical stability of longer-run inflation expectations, the economists wrote.

the chairman of the U.S. central bank, has largely attributed the spike in consumer prices to pandemic-induced disruptions in the supply chain, a shortage of that's pushed wages higher and a wave of pent-up consumers flush with stimulus cash.

Powell has maintained the rise in inflation is likely transitory and has warned about the dangers of the Federal Reserve acting superfluously to lower the benchmark federal funds rate.

The Fed adopted a new strategy last summer in which it will keep the benchmark federal funds rate near zero, even if inflation rises above its preferred 2% rate, in order to reach maximum employment. But inflation has been rising in the fastest pace in more than a decade and is well above the Fed's preferred target of 2% over the past couple of months. In August, the gauge hit 4.3%, a 30 year high.