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In June, inflation rose to a yearly rate of 5.4%, led by increases for gasoline and used cars.
Since last year, Washington has pumped about $4.5 trillion into the economy.
Government spending contributes to inflation, but so do other factors, like supply-chain disruptions that produce temporary shortages.
With a vote on raising the federal debt limit looming, Florida Republican Sen. Rick Scott is pressing the case that spending has to come down. In Scott’s view, there’s clear proof that Democratic fiscal policies have already made it harder for average families to pay their bills.
"Thanks to the insane tax-and-spending spree of President Joe Biden and Democrats in Washington, we are seeing six straight months of raging inflation," Scott said in a July 26 press release.
Senate Republicans, led by Scott, followed that up with a press conference on inflation. Scott pointed to a chart showing rising prices for household essentials, like gasoline, milk and eggs.
Compared with a year ago, the consumer price index was up 5.4% in June, the fastest pace since August 2008.
There’s no question that high levels of government spending can fuel inflation. But the spending that has occurred since Biden took office, primarily through the American Rescue Plan, accounts for just a part of new government spending over the past 18 months.
Other potential factors are also at play in raising prices: short-term supply interruptions, labor shortages, tariffs on imported goods, or simply the cyclical growth in consumer demand when the economy is recovering from a downturn.
Economists looking at today’s inflation caution that the precise cause is hard to pin down, and they vary on how much impact the most recent spending is having.
But all of them underscore that heavy spending isn’t just a Biden administration phenomenon. It started over a year ago, as the government tried to protect Americans and the economy from the ravages of COVID-19.
In reviewing Washington’s actions, we look at actual spending, rather than the maximum amount allowed under any measure. That’s because where inflation is concerned, what matters is when the money gets into people’s pockets.
There have been several major coronavirus relief packages. The largest was the CARES Act, passed in March 2020 and signed by President Donald Trump. According to the Covid Money Tracker from the Committee for a Responsible Federal Budget, that bill has put $1.97 trillion into the economy to date.
The CARES Act provided such pillars of federal aid as the Paycheck Protection Program for companies and their workers, and expanded unemployment benefits for the millions of people who lost their jobs.
Congress refilled the Paycheck Protection Program in April 2020, along with other aid, at a cost of about $500 billion.
In December 2020, Congress passed additional relief, including $600 checks for most Americans. About $770 billion has been spent so far.
The most recent bill was the American Rescue Plan Act championed by Biden and congressional Democrats and signed in March 2021. So far, spending from that has reached $1.05 trillion.
The U.S. Treasury Department’s COVID-19 page shows that overall, as of the end of May 2021, federal agencies had spent or committed about $3.5 trillion since the pandemic began. The Committee for a Responsible Federal Budget, using different methods, puts the latest tally at about $4.45 trillion.
There are other amounts that can be folded into the totals, but it’s safe to say about two-thirds of the spending took place before Biden took office.
"I wouldn't ascribe the government spending necessarily to Biden, as the increase in government spending to help curb the effects of COVID was already occurring during the Trump administration," said Columbia University economist Jennifer La’O.
Scott spoke of "six straight months of raging inflation." That’s an exaggeration. The consumer price index has been rising this year, but on a month-to-month basis, inflation didn’t start accelerating significantly until March. (We look at month-to-month changes, rather than year-over-year, because 2020 was such an unusual year.)
In January, prices went up 0.3%. February’s increase was 0.4%. That’s lower than in June and July the year before.
But between March and June this year, the Consumer Price Index had an average monthly increase of 0.7%.
The prices of some goods, such as gasoline and used cars, have gone up dramatically. Other increases are more modest, but they’re still important for household budgets. Grocery prices are up 0.9%. Clothing is nearly 5% more expensive.
Across the board, the cost of living rose 0.9%. Economy watchers look less at that topline number, and more at what is driving it. It turns out the used cars and trucks accounted for a third of the overall increase in the CPI. Federal Reserve Bank chairman Jerome Powell said that’s unlikely to last.
"Used car prices are going up because of sort of a perfect storm of very strong demand and limited supply," Powell said at a June 16 news conference.
A global shortage of semiconductor chips has curtailed vehicle production and thinned new-car inventories, so more buyers have turned to used car and trucks, pushing up prices in that market. Eventually, Powell said, supply chains will get back on track and the surge will ease. That’s what happened with an earlier spike in lumber prices.
There is a risk of more deeply embedded inflation, but there are few signs of that so far.
Economics 101 holds that when you add hundreds of billions of dollars to an economy, at least some people will go out and buy things. If supply doesn’t ramp up at a commensurate pace, increased demand will lead to higher prices.
Macroeconomist John Leahy at the University of Michigan thinks Washington’s spending since last spring is fueling that type of cycle.
"The root cause of inflation is most likely the increase in aggregate demand for goods, and this increase in demand has been caused in part by the increase in government spending," Leahy said. "Supply bottlenecks help to explain why supply has not kept pace with demand, but they are not prime mover."
Stanford University economist Peter Klenow has no quibble with that basic idea, but he says he’s skeptical that much of this tracks back to Biden. Klenow points to studies like one from the New York Federal Reserve that found that only about 30% of stimulus money was spent on goods. About 70% of the money went into savings or paid down debt. That money wouldn’t spur demand or lead to higher prices.
Klenow also doubts that a relief package passed in March 2021 would drive up inflation just three months later.
"Estimates of the effects of government spending in earlier years typically find a lag of a year or two between the spending and any noticeable effect on inflation," Klenow said.
One final point on inflation and tax policy: Scott talked about Democrats’ "tax and spending spree." While Biden has said he would like to raise taxes on corporations and on people making over $400,000 a year, that has yet to happen.
That aside, Leahy said that in the short run, taxes tend to trim demand, and reduce inflationary pressures.
"Tax hikes on consumers reduce disposable income and thereby reduce consumer spending," Leahy said. "Tax hikes on business tend to reduce profits and thereby reduce investment. "
We reached out to Scott’s office to ask about the role of taxes and Biden’s spending and did not hear back.
Scott said, "Thanks to the insane tax-and-spending spree of President Joe Biden and Democrats in Washington, we are seeing six straight months of raging inflation."
Inflation is up, and there’s broad agreement that government spending has been a factor.
However, most of the big spending coursing through the economy took place before Biden and the Democrats were in charge in Washington. In the past, there’s been a lag of one to two years between higher government spending and higher inflation. The massive relief package in March has had little time to spur inflation.
As for taxes, they haven’t gone up. And if they had, that would tend to put the brakes on inflation.
We rate this claim Mostly False.
Rick Scott, Sen. Rick Scott and The Heritage Foundation Release Episodes 3 and 4 in ‘Road Trip on a Budget’ Video Series, July 26, 2021
Bureau of Labor Statistics, Consumer price index June 2021, July 13, 2021
Bureau of Labor Statistics, CPI - Urban 1-Month Percent Change, July 13, 2021
U.S. Treasury Department, Federal response to COVID-19, accessed July 28, 2021
Committee for a Responsible Federal Budget, Covid Money Tracker, accessed July 28, 2021
Federal Reserve Bank, Transcript of Chair Powell’s Press Conference, June 16, 2021
National Council of State Legislatures, COVID-19 Economic Relief Bill, Jan. 4, 2021
Federal Reserve Bank of New York, How Have Households Used Their Stimulus Payments and How Would They Spend the Next?, Oct. 13, 2020
Federal Reserve Bank of Chicago, Heterogeneity in the Marginal Propensity to Consume: Evidence from Covid-19 Stimulus Payments, February 2021
Financial Times, Sticker shock: what is driving US inflation higher?, July 13, 2021
Wall Street Journal, How Inflation Threatens the Recovery, July 21, 2021
Kiplinger, Inflation Will Cool… Later, July 13, 2021
PolitiFact, Yes, prices are higher under Biden, but recovery from the pandemic is key reason, May 27, 2021
PolitiFact, Rising inflation fears are real but complex, July 1, 2021
PolitiFact, How big is the threat of inflation in the post-pandemic era?, May, 13, 2021
Email exchange, Pete Klenow, professor in Economic Policy, Stanford University, July 27, 2021
Email exchange, Jennifer La'O, associate professor, Department of Economics, Columbia University, July 27, 2021
Email exchange, John Leahy, professor of Macroeconomics, University of Michigan, July 28, 2021
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