Stimulus Checks Aren’t Consumer Spending (or Inflation) Rocket Fuel

For weeks now, several prominent economists have argued the recently passed $1.9 trillion American Rescue Plan portends hot inflation, stirring some investors’ fears. Unlike prior COVID relief packages, they argue, this package splashes out too much cash, which will inevitably slosh around the economy and pump prices higher. We disagree with this for a host of reasons, not least because there isn’t much evidence money is changing hands quickly. Some recent survey and data results illustrate this, showing why investors needn’t fear runaway inflation hurting stocks.

Exhibit 1 shows results from a recent New York Fed survey, which asked stimulus check recipients how they allocated proceeds among spending, saving and paying down debt. Perhaps surprising many, recipients reported spending only 26% of funds (on average across the three rounds of stimulus checks), saving or paying down debt with 73%.

Exhibit 1: Distribution of Stimulus Check Usage

Source: New York Federal Reserve, as of 4/19/2021. Figures may not sum due to rounding.

While the percentage spent was surprisingly small, the checks were still big enough to impact retail sales data. As Exhibit 2 shows, each of the four largest monthly gains in recent years (May 2020, June 2020, January 2021 and March 2021) occurred in the aftermath of COVID relief checks fanning out. However, the post-check bounces were short-lived, which suggests the impact from the latest round is mostly in the rearview already. Absent additional waves of checks, retail sales growth is likely to decelerate.

Exhibit 2: US Retail Sales Growth (Month-Over-Month Percentage Change)

Source: US Census Bureau, as of 4/19/2021.

Of course, the stimulus checks are only one aspect of the American Rescue Plan. However, according to CBO analysis, the checks are the largest component of the plan, accounting for 36% of fiscal year 2021 outlays. Additionally, the next two largest components, state and local government relief and unemployment compensation are, to a large degree, replacing pre-pandemic income rather than adding to it. Substitution isn’t stimulus. So while we acknowledge the package may impact some prices by boosting demand of some goods relative to supply, that doesn’t equate to broad inflation, which entails prices rising across the entire economy for a significant length of time.

Exhibit 3: American Rescue Plan Spending Details

Sources: US Congressional Budget Office and US House of Representatives Archives, as of 3/22/2021.

That doesn’t mean inflation is permanently absent. But lasting inflation probably requires a lasting pickup in the velocity of money, which we haven’t seen. To the extent any official money supply measures accurately capture what society uses as money, last year’s huge increases didn’t stoke inflation. If that changes, velocity won’t just jump out of nowhere. There will be tells, most likely from a significantly steeper yield curve and rising lending. Even then, rising inflation has accompanied some excellent years for stocks.

So inflation fears aren’t reason to be bearish today. They aren’t likely to come true in the near term, and even if prices rise further out, there should be plenty of time for investors to evaluate economic conditions overall.