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Home » News » Commentary » Unnecessary government spending helps fuel inflation
Commentary

Unnecessary government spending helps fuel inflation

Nick LinderBy Nick LinderJuly 19, 2021Updated:July 20, 2021No Comments5 Mins Read
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Today, we find ourselves at the hand of governments collectively undertaking one of the most consequential and significant economic experiments of our lifetimes: printing money at record rates to give it to many people who don’t need it, implementing restrictions that disrupt global supply chains, and paying people to stay home long after it was justified. A perfect storm for inflation, both the current fiscal and monetary policy of the federal government has instituted a hidden tax that hurts low-income families.

New data released by the Labor Department last week reveal that consumer prices across the economy rose month-by-month at a level greater than any other experienced in the last 13 years.

Increasing by 0.9% from May to June, the Consumer Price Index (CPI) is measured by a “basket of goods” from across the economy to represent, in the closest way possible, all households in the U.S. and what they are spending their money on.

The CPI rose 5.4% over the last year, meaning that, on average, the cost of all goods across the economy increased by the same.

The Federal Reserve aims for two percent inflation each year, so 5.4% is a highly concerning figure. 

If paychecks don’t increase at the same rate, the American people will feel what is essentially a hidden tax on everything they pay for.

The current state of inflation and the value of the dollar stems mostly from the fiscal and monetary policies of the federal government over the last year.

Stimulus payments were enacted with the purpose of being spent by consumers to stimulate the economy at a time of economic downturn.

According to the Bureau of Economic Analysis (BEA), the savings rate, which is a measure of personal savings as a percentage of disposable income, jumped from 8.3% in February 2020 to a record 33.7% in April 2020, after the first round of stimulus was passed through the CARES Act, in the form of $1,200 checks.

That means a lot of that money got put into peoples’ savings accounts, not spent back into the economy, though families could have spent those funds by now. 

The savings rate eventually came down to as low as 13.1% in November, still far above its normal, pre-pandemic level, before gradually rising again.

Then, after another round of stimulus was passed by Congress, this time in the form of $600 checks, the savings rate rose to 20.7%, still a higher-than-normal figure. 

It dipped again in February before hitting 27.6% after the American Rescue Plan Act was passed in March, and with it, more stimulus checks. Since then, the percent of disposable income saved has fallen, eventually hitting 12.4% in May.

Still, there’s a way to go before it’s restored to pre-pandemic levels. The personal savings rate for 2019 was 7.6%. In the last decade, the savings rate fell between 6.3% and 8.8% in all but one year, when it hit 12% in 2012.

Now that this experiment has had over a year to marinate, the data reveal that the shutdowns and stimulus payments had several outsized, unintended effects besides spurring spending across the economic spectrum.

Lumber, a key economic indicator for the housing market, shot up in price this past May, up to as much as $1,711.20 per thousand board feet. A May Case-Shiller pricing index composed of data from 20 cities found home prices rose 13.3% on an annual basis in March, partially due to the inflated lumber costs.

Though the price of lumber has stabilized, home producers are unlikely to lower costs back down.

As a result of global semiconductor shortages, needed for production of the computerized components of cars, used car prices have soared in the last year, climbing as much as 10% in June alone. It’s to the point that some new cars are now worth less than their less recent, used counterparts.

Gas also has seen severe increases this summer, with the average price rising above $3 per gallon in May.

Airfare prices are rising sharply, too. Per the Washington Post, “Average ticket prices for domestic travel have risen 7 percent since May, while international fares are up 13 percent in the same period.”

Couple all of that with enhanced unemployment benefits that are far too generous for the current state of the nation, still $300 a week plus various tax credits in addition to state unemployment benefits, and global supply shortages, and we find ourselves in an overheating economy.

Combining these data and statistics with new inflation numbers explains the story. The government injected an unprecedented amount of money, to the tune of trillions of dollars, into the American economy after many state and local governments forced economic closures.

The government has spent its way into an inflationary mess, which we’re already feeling across the economy. Don’t be surprised if everyday expenses continue to be more costly and your disposable income shrinks as the economy hobbles its way toward a full recovery.

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Nick Linder

Nicholas Linder, of Cincinnati, is a communications Intern for Maine Policy Institute. He is going into his second year of studying finance and public policy analysis at The Ohio State University. On campus, he is involved with Students Consulting for Nonprofit Organizations and Business for Good.

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