With 127 million $1,400 checks having been disbursed, pundits are predictably debating, yet again, about inflation. Will the checks be inflationary? My answer, again, is an empathic ‘no’. Similar to the first and second round of Covid stimulus payments, CPI will not budge much, if any. the US dollar will not fall, and treasury yields will not rise much.
I discuss in further detail in the below posts  about why I am not concerned about inflation and the national debt
To recap, when economists talk about inflation, it can mean one of several things:
- Inflation as in an increase of the money supply (M1, M2, etc.)
2. Inflation as in a rise of the price level of goods as measured by CPI.
3. Inflation as in rising price levels of one country relative to another.
4. Inflation as in rising price levels due to the depreciation of a borrower’s currency against a creditor.
Just as cosmologists are puzzled about the origin of inflation as it pertains to the big bang and the expansion of the universe, the cause/source of economic inflation is also a hotly debated topic among economists. Even the accuracy of CPI as a measure of inflation is also contested, as it excludes items that have exhibited inflation.
Inflation can be classified as either endogenous or exogenous. An example of the latter is an oil shock (like in the early 70s), which causes commodity prices to price, and this is felt across the entire economy. Another example could be a debtor country that has a debt denominated in another currency , that being the creditor, an example being the hyperinflation of Weimar Republic. Endogenous inflation is due to factors within a country intrinsic to the economy itself, such as stimulus programs, the cyclicality of business cycles, or increased bank lending or leverage. Both of these contribute to inflation.
Being that the US borrows in dollars and that the greenback is a global ‘unit of wealth’ and a global reserve currency, it means that the US is largely immune to #3 and #4. The US dollar falling against the Euro does not make Americans poorer. Americans tend to compare their wealth to each other, whereas foreigners tend to measure their own wealth in dollars instead of their local currency. Likewise, Americans do not care how their wealth fluctuates relative to that of Japan or Germany.
#1 #2 are also not much of a concern either. Inflation often amounts to just a shifting of the x and y axis, in that everything goes up: wages, stock prices, interest rates, interest on bank deposits, real estate prices, rent, food, etc. It is not like wealth is destroyed by inflation, unless either you keep your money in cash and the fed is ‘behind the curve’ in terms of CPI exceeding the federal funds rate. Stocks and real estate have generally proven to be good hedges against inflation, as prices can adjust to rising input costs. Conversely, fixed income does poorly (in terms of generating a real return) during sustained periods of high inflation. Moreover, as discussed in the below links, much of the stimulus money is used to pay down existing consumer debts. Thus the stimulus is possibly deflationary and amounts to a form of QE in which high-yielding debts (credit card, car, tuition, consumer, etc) are replaced with low-yielding ones (treasury bonds).
Another reason I am not concerned is that increased consumer spending due to stimulus is not necessarily inflationary. It is a common media narrative that increased spending is inflationary. Again, economists don’t really know what causes inflation. It is not as direct/simple as stimulus = inflation. For example, consumer electronics prices have fallen steadily in real and absolute terms over the past half century in spite of increased consumption/demand. So American suddenly being flush with cash to spend on food and electronics does not mean that stores and manufactures have to raise their prices to accommodate this increase of demand. Manufactures can accommodate this demand by simply producing more, assuming there is some slack in the system. Or by taking advantage of economies of scale or efficiently-boosting technologies.