Jul 6, 2022 - Economy & Business

Too much inflation aid from states could prolong the problem

Illustration of a hand holding a marionette bar with hundred dollar bills attached to the strings
Illustration: Sarah Grillo/Axios

Political efforts to blunt the impact of inflation could end up prolonging it.

Why it matters: Politicians are caught in a bind as to whether they should offer short-term inflation relief for struggling constituents — or help address the underlying causes by curtailing consumer demand.

Driving the news: Some states are touting “inflation relief” checks for residents — effectively amounting to fiscal stimulus — to help them deal with rising prices.

  • California is offering checks of up to $1,050 to individual taxpayers, as part of a $17 billion relief package signed last week, with more money going to those with lower incomes.
  • With state government coffers strong, places like Colorado, Indiana, Maine and Delaware are offering similar, smaller programs, mostly structured around tax rebates and enacted by both Democratic and Republican leaders.

The big picture: The Federal Reserve is the main cop on the inflation beat right now. Chair Jerome Powell has said as much, shouldering the responsibility for reversing it; President Biden has separately voiced the same.

  • But the Fed’s tools are blunt. In the supply and demand equation, they don’t have any control over the snarled supply chains that lead to scarcity and higher prices. All the Fed can do is cool demand.
  • Yet these states appear to be undermining the Fed's efforts — drawing up plans to send more dollars into the economy to create more demand.

State of play: If the number of states sending out inflation rebates remain low, it's unlikely to create an inflationary jump for the U.S. as a whole, says Sonal Desai, fixed income CIO at Franklin Templeton.

  • But at scale, that would start to change. "If you see most states going in this direction, it makes the whole job of controlling inflation that much harder," she adds.

The other side: A spokesperson for Delaware's Department of Finance tells Axios that if the cash the state's sending to residents were to, instead, be funneled into things like construction projects, then that could negatively impact inflation by worsening the supply problems.

The bottom line: Most Americans probably don’t closely study things like the economics of fiscal stimulus, or how the Fed’s dual mandate works.

  • But they do know that inflation is making things harder for them. About 15% of California renters are behind on rent, and half of those say they're likely to face eviction, Governor Gavin Newsom's budget spokesperson says.
  • Many states have budget surpluses this year — so it shouldn't be surprising that leaders (many of whom will seek reelection at some point) are looking to offset the pain.

Go deeper: San Francisco Fed president Mary Daly speaks to Axios Macro about those inflation relief checks.

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