Several states are planning to dole out financial assistance amid explosive inflation, although doing so could end up making prices more difficult to drive down.
California, the country’s largest state by population, drew national headlines when Gov. Gavin Newsom signed a $308 billion state budget last month that included offering “inflation relief” checks to millions of Californians of up to $1,050.
Last month, Colorado also announced that taxpayers would receive cashback rebates of $750 for individuals and $1,500 for joint filers. Delaware said it would be giving its residents one-time rebate payments of $300 to help with higher prices.
Stan Veuger, a senior fellow at the American Enterprise Institute, said that a lot of states are realizing that they have large budget surpluses. Instead of saving those funds, some states have decided to offer rebates in light of the soaring prices. It is worth noting that some states are statutorily required to dole out rebates when there are budget surpluses.
COMMODITY PRICES DROP IN SIGN THAT INFLATION MAY BE PEAKING
Veuger said that by increasing the cash that consumers have on hand, while some will put it into savings, many will go out and spend that money on goods, thus increasing demand and pushing back against the Federal Reserve’s mission to depress spending and drive down inflation.
“Obviously, you create more demand, and there is no obvious supply-side effect, so you would expect prices to go up,” he told the Washington Examiner.
The effects of just a few states implementing these “inflation relief” payouts might be marginal compared to the massive 8.6% annual price increases being tallied by the consumer price index, but they still inherently put pressure on the Fed’s current rate-hiking mission.
San Francisco Fed President Mary Daly weighed in on the California rebates during a recent interview with Axios. While Daly acknowledged that the checks will be a demand support, she also pointed out that they are isolated to the Golden State and targeted at low- and moderate-income individuals.
“If you thought that inflation was going to erode purchasing power for these groups, now they have more money to fund themselves, and their spending will be higher,” Daly said.
There is also likely a political tinge to some of the payouts and marketing of them, according to Veuger. This year is an election year, and Republicans are desperate to regain control of Congress, and Democrats are desperate to hold on to their tenuous grasp of both chambers.
Inflation is the No. 1 issue on voters’ minds, and it will certainly be a political hot potato during the run-up to the midterm elections.
A recent CBS/YouGov poll found that 71% of U.S. adults surveyed gave the president bad marks on inflation. The survey also found that 66% disapproved of Biden’s overall handling of the economy, and 59% disapproved of Biden’s job performance more generally.
Voters are likely to welcome the rebate checks with open arms, given the higher costs being felt at grocery stores and gas pumps.
Indiana’s Republican governor cited the higher prices when he announced a plan to give back $1 billion of state reserves to taxpayers after a year of higher than expected revenue. Under his plan, each resident would receive an extra $225 on top of the $125 they are already receiving as part of the state’s automatic taxpayer refund.
“Hoosiers have real needs right now during this period of high inflation, from the gas pump to buying groceries, and everyone should benefit from the state’s success,” said Gov. Eric Holcomb.
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The Fed has already hiked interest rates three times this year, with the most recent being in June, when it hiked its interest rate target by three-quarters of a percentage point to a range of 1.5% to 1.75%.
While there are some indicators that inflation might be cresting, it is expected to take months for prices to fall back down to the central bank’s 2% target range, meaning that consumers will be feeling the inflationary sting for quite some time to come.
