Government spending has little to no impact on government spending

Does government spending cause inflation? Now that we’ve looked at the definition and drivers of inflation, let’s address our question: does government spending cause inflation? The answer, roughly, is yes – and in other cases, no. Historical studies on government spending and inflation Studies of the historical link between government spending and inflation find that the link is tenuous. In particular, one study by the found that government spending has little to no impact on inflation. In fact, a 10% increase in government spending may lead to a 0.08% decline in inflation. Others have found that government spending around the world may have minimal impacts on inflation, often in the tenths of a percentage point. Government spending and Covid-19 On the other hand, modern studies have found that the current link between government spending and inflation may be stronger. In particular, the 2022 inflation spike followed two major federal spending programs under two administrations. The first, the CARES Act, passed in March 2020, while the American Rescue Plan passed in March 2021. Collectively, these initiatives aimed to minimize the economic devastation of Covid-19 by distributing three stimulus checks, expanding unemployment benefits and providing extra funds to state and local governments. While experts have credited these Acts with , economists have also found that their passage correlates with an unusual spike in inflation. By providing extra capital to American households, economists note, consumers were able to go out and spend money they wouldn’t have had otherwise. In turn, this increased consumer demand, pulling up prices. However, a recent analysis from the found that government spending only contributed to about three percentage points of today’s inflation. These findings corroborate an that suggested stimulus checks made inflation slightly worse – but not to the extent we’re seeing now. A full half of today’s inflation, they discovered, stems from ongoing supply chain issues as producers struggle to push out enough goods to meet demand. The war in Ukraine and resulting energy shortage, alongside a turbulent housing market, have also contributed to inflation, pushing up prices from several directions at once. Not all government spending leads to inflation However, not all government spending is correlated with higher inflation. It appears that the size and style of intervention matters. For instance, the recent infrastructure bill is unlikely to contribute to higher inflation. Measures like this aim to buff economic productivity instead of consumer wallets. In other words, instead of flooding the economy with capital via stimulus checks or tax cuts, they invest in new technologies and jobs. (Both of which, 17 Nobel-winning economists believe, could .)