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Is the stimulus to blame for high inflation?

While many economists agree that the American Rescue Plan did worsen inflation by giving people more money to spend, they continue to disagree about the extent.

A view of a red traffic light in front of the US Capitol in Washington on March 23, 2020.
Saul Loeb/AFP via Getty Images

Ahead of the midterm elections, Republicans have blamed the Biden administration for the fastest inflation in four decades, arguing that the $1.9 trillion American Rescue Plan has been one of the major drivers.

In September, inflation climbed 8.2 percent compared to a year ago and 0.4 percent from the month before, according to a Consumer Price Index report published on Thursday.

After Thursday’s release, Rep. Jason Smith, the top Republican on the House Budget Committee, pointed to the American Rescue Plan as one of the reasons Americans “are feeling the sticker shock of rising prices every time they visit the grocery store or the gas station.” Earlier this month, the Republican National Committee also tweeted: “Every Democrat who voted for Biden’s ‘stimulus’ needs to answer at the ballot box for sending prices surging and making American families poorer.”

The American Rescue Plan, intended to stimulate the economy from the effects of the pandemic, was a massive spending package that passed in March 2021. The legislation included $1,400 checks for individuals, expansions to unemployment insurance and child tax credit benefits, and hundreds of billions in aid to state and local governments.

For months, economists have debated the American Rescue Plan’s impact on inflation. While many economists agree that the stimulus law did worsen inflation by giving people more money to spend, they continue to disagree about the extent. The debate is, in part, about what else might be to blame in the United States and globally. Inflation started shooting up in early 2021 after the package passed and has remained stubbornly high since. But even without the stimulus, inflation would have increased. The coronavirus led to factory shutdowns around the world, shipping backlogs, and labor shortages, all of which have strained supply chains and pushed prices higher.

The disagreement essentially boils down to economists’ views on how pandemic-related factors independent of the stimulus, such as a shift to working from home, have contributed to inflation and how unique inflation has been in the United States compared to other countries.

What do housing costs tell us about how the stimulus affected inflation?

Some economists say that recent research and new data have reaffirmed their belief that the stimulus package did not significantly fuel inflation.

Increased housing costs have been a big driver of inflation — shelter is the largest component of the Consumer Price Index and makes up about 30 percent of overall inflation as measured by the index. Dean Baker, a senior economist and co-founder of the liberal-leaning Center for Economic and Policy Research, argued that new research on housing inflation helped support the idea that price gains were mostly driven by a mass shift to remote work and not the stimulus package. As people shifted to remote work, housing prices went up, and those prices in turn pushed overall inflation higher.

An analysis published by the Federal Reserve Bank of San Francisco on September 26 examined the rapid rise in housing prices and whether remote work, or other factors like fiscal stimulus, led to the increase. The authors — Augustus Kmetz, John Mondragon, and Johannes Wieland — wrote that as more people started working remotely, they sought out additional space at home. That resulted in a spike in housing demand and helped lead to a surge in prices.

The researchers estimated that remote work resulted in house prices rising by about 15 percent from November 2019 to November 2021, which accounts for more than 60 percent of the overall increase in house prices.

“It means we can’t blame the stimulus. Clearly that added to it,” Baker said. “But the main story there is this big switch to working from home.”

Is the US an outlier — or part of a global trend?

Other economists are skeptical of the idea that a shift to remote work drove inflation higher since the stimulus package gave people more money, which they could spend on housing.

“You can spend more on your house if you’ve got more money, and they did, so I don’t buy that at all,” said Douglas Holtz-Eakin, the president of the conservative American Action Forum and a former director of the Congressional Budget Office.

Holtz-Eakin said it was clear that the package significantly drove up inflation and pointed to research from the Federal Reserve Bank of San Francisco, which published an analysis in March that found that “fiscal support measures designed to counteract the severity of the pandemic’s economic effect” could have “contributed to about 3 percentage points of the rise in U.S. inflation through the end of 2021.”

The analysis — which was written by Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes — found that the United States’ “core” inflation, which strips out volatile food and energy prices, rose more quickly in 2021 compared to the average rate of core inflation of other wealthy countries. Compared to the other countries — Canada, Denmark, Finland, France, Germany, Netherlands, Norway, Sweden, and the United Kingdom — the United States injected more fiscal stimulus into its economy.

“The difference is really the stimulus in the US,” Holtz-Eakin said.

But Josh Bivens, the director of research at the left-leaning Economic Policy Institute, said that inflation has been ubiquitous “across every advanced economy” since the pandemic began and he didn’t believe the American Rescue Plan was a major contributor to inflation. An analysis published in August by Bivens, Asha Banerjee, and Mariia Dzholos examined the United States’ core inflation from December 2020 to May 2022 and compared it to core inflation in other Organization for Economic Cooperation and Development (OECD) countries. To calculate the rate of acceleration in each country, the researchers took the difference between the “post-pandemic” core inflation and the “pre-pandemic” core inflation using data from 2018 and 2019.

The researchers found that the acceleration in the United States’ core inflation was “on the higher side” but was “far from the top” and not that far above the average for all other OECD countries. All but one OECD country saw an acceleration in core inflation, the researchers found. For example, Canada’s core inflation grew at a slightly slower rate compared to the United States, but Portugal’s sped up faster, according to the analysis.

“High inflation in the U.S. has not been driven by any unique American policy — not the American Rescue Plan and other generous fiscal relief during the pandemic recession and recovery nor anything else U.S.-centric,” the researchers wrote.

Bivens also pointed to the Federal Reserve Bank of San Francisco’s research on housing inflation and said that price gains in the United States were mostly driven by pandemic-related events that would have occurred without the stimulus — like supply chain disruptions and increased demand for housing. And although he said he believed the American Rescue Plan had inflationary impacts, the trade-off was necessary to stave off higher unemployment numbers.

“We could have kept inflation much lower in the US if we had raised interest rates through the roof beginning in early 2021 and hadn’t done the stimulus package,” Bivens said. “But there would be a huge cost to that. We’d be looking at a very different labor market with much higher unemployment.”