Are America’s stimulus checks inflationary?

-Andrew Macken

Inflation risks are top of mind for investors today. Should inflation take hold in an uncontrolled way, equity prices would surely face headwinds. And with the US government literally mailing US$1,400 checks to its citizens, one could be forgiven for getting a little nervous. But we believe core inflation will not be a problem (as we explained in our Spotlight Series podcast recently). And furthermore, a recent analysis of US stimulus checks shows that most of these proceeds are not even being consumed today.

Over the course of the last year, most Americans in need have received direct payments from the US government in form of stimulus checks. There were three in total: the first and second under President Trump for US$1,200 and US$600, respectively; and the third under President Biden for US$1,400.

These amount to sizeable fiscal injections by the government directly into the US economy. The most recent round of US$1,400 checks, for example, equates to approximately US$400 billion in aggregate. And many have suggested that such large-scale government handouts could well lead to excessive inflation – especially when these checks are being sent to the people who need them most.

But here is the interesting thing: only about one-quarter of these direct handouts is actually being consumed. The remainder is being saved or used to pay down debts.

According to research from the Federal Reserve Bank of New York:

“We find remarkable stability in how stimulus checks are used over the three rounds… The average share of stimulus payments that households set aside for consumption—what economists call the marginal propensity to consume (MPC)—declined from 29 percent in the first round to 26 percent in the second and to 25 percent in the third.”

How US Households Use Their Stimulus Checks

Source: FRBNY

The authors’ explanation for this consumer behaviour is logical:

“Our findings indicate that in an environment that continues to be characterized by constraints on many activities and by high unemployment, as well as high uncertainty about the duration and continued economic impact of the pandemic… households planning to use the third relief payments mostly to pay off debt and save.”

The less money that is spent, the less inflationary these checks are. And this is good news. We would ideally like to see a strong US economy – but not one that overheats by driving aggregate demand growth to levels far above the capacity of the US economy.

On the indicators we have seen to date, the probability of this “goldilocks” scenario playing out appears quite high. Balance sheets of the US consumer, which have been in continual repair since the GFC, have improved significantly again as a direct result of the government’s fiscal support in combination with the Fed’s low interest rate policy. This can be clearly observed in the chart below which illustrates the debt service payments of US households as a percentage of disposable personal income.

This says to us that when the uncertainty subsides, US households will look to recommence borrowing to fund consumption. And there is now plenty of capacity of this to happen. Said another way, these healthy consumer balance sheets will likely underwrite a sustainable expansion in US consumption for many years to come.

Andrew Macken is the Chief Investment Officer at Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.