Inflation has increased substantially over the past few months, and it could rise even further by mid-2022. Why has inflation increased? What role do stimulus checks play in inflation? What are the implications of this inflation? We’ll answer all of these questions below.
Stimulus checks are another way for the government to use fiscal policy to stimulate inflation. When you receive your stimulus check from Uncle Sam, you’re essentially getting money from your government without having to work for it.
This means that you have more income available to spend on goods and services within your local economy, which can help drive up prices over time.
Do Stimulus Checks Fuel Inflation?
The implication of inflation being higher than expected is that the Fed will have to be more aggressive in its monetary policy. This means that the Fed’s target range will likely be increased, and therefore so will the Fed funds rate. For example, if the current target range for 2020 is 2%–2.25%, it may increase to 2%–2.50%. The implications of this are two-fold:
- First, investors will buy assets with higher yields;
- Second, borrowers with longer maturities must pay higher interest rates on their debt because they have less time until their loans mature.
Inflation accelerated to 1.7% on an annualized basis in the first quarter, compared with 1.4% in the fourth quarter of 2018. This is still well below the Fed’s target of 2% and was driven by a surge in energy prices which jumped 17%.
However, economic growth has been calculated at just 2%, down from 2.1% previously and it is expected that inflation will increase as a result of stimulus checks.
Inflation is approaching historic highs in the U.S., and it’s not slowing down anytime soon. With the economy continuing to expand at a moderate pace, we expect inflation to remain elevated in the coming months. In fact, we anticipate that inflation will continue rising throughout this year and into next year as well; forecasts suggest that inflation could reach 5.8% by mid-2022—the highest level since 2008-2009!
