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Experts warn California’s ‘inflation relief’ could actually send high prices even higher

Sacramento Bee 6/28/2022 David Lightman, The Sacramento Bee
Will the rebate plan offered by Gov. Gavin Newsom and legislative leaders do much if anything to ease inflation? © Hector Amezcua/The Sacramento Bee/TNS Will the rebate plan offered by Gov. Gavin Newsom and legislative leaders do much if anything to ease inflation?

The “inflation relief” package championed by Gov. Gavin Newsom and Democratic legislative leaders could have the opposite effect, pushing inflation — now at its higher level in 40 years — even higher, top economists say.

“One-off tax holidays or rebates which put more money in people’s pockets without doing anything to boost supply are inflationary,” said Jared Walczak, vice president of state projects at the Tax Foundation, a Washington-based research group.

Gov. Newsom and Democratic legislative leaders have agreed on a $17 billion relief package that includes $9.5 billion in inflation relief funds. An estimated 17.5 million California taxpayers will receive between $200 and $1,050 by early next year. Amounts will depend on income and family size.

The Bee contacted economists familiar with California. All but one saw the plan as having the possibility of adding to inflation.

“Any increases in government spending will generally increase inflationary pressures,” said Michael Shires, associate professor of public policy at Pepperdine University.

Newsom’s advisers said otherwise.

“It’s our view that this package will have a minimal effect on inflation — as it’s one-time and not ongoing relief — and by comparison is dwarfed by the size of the federal assistance provided during the pandemic,” said H.D. Palmer, spokesman for the state Department of Finance.

Washington sent out three rounds of stimulus payments, as well as providing other benefits, in 2020 and 2021 and inflation remained largely under control.

“While we appreciate the academic arguments over what incremental effect this might have in the long term, Californians are dealing directly with the real-time price spikes fueled by inflation — and how it’s squeezing their day-to-day budgets right now,” Palmer said.

Among the evidence he cited: As of last month, 15% of California renters were behind in their payments, and many said they were very or somewhat likely to leave their homes due to eviction.

Why are prices up so much?

Newsom and legislative leaders call their plan an “inflation relief” package. Nationally, prices jumped 8.6% in the 12 months ending in May. Increases in California averaged an annualized rate of 9.2% this spring, according to the UCLA Anderson School of Management analysis.


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Several factors drove the spike. The Russia-Ukraine war has tightened oil supplies. Consumer demand has increased as people travel more now that the Covid pandemic has eased. Supplies of many items have remained tight as producers struggled to meet suddenly increased demand.

Food prices have gone up 10.1% in the past year. New car prices nationally were up 12.6% over the last year. Air fares rose 12.6% just in May.

The Federal Reserve Board is scrambling to weaken demand by raising interest rates. It increased the key rate three-fourths of 1% earlier this month, its biggest one-time hike since 1994, and is expected to increase rates again next month.

But putting more money into circulation, as the California agreement gives people more to spend, could reduce incentives to keep prices stable.

“It will add to demand and stroke inflation,” said Sung Won Sohn, president of Los Angeles-based SS Economics..

Experts at Moody’s Analytics cited as an analogy of a federal gas tax holiday, which President Joe Biden proposed last week. His plan is going nowhere in Congress.

“When inflation is as high as it is today, the federal government’s priority should be to do no harm. A gas tax holiday does not pass this test,” economist Bernard Yaros wrote. “A suspension of the federal gas tax risks boosting gasoline demand at a time when supply is constrained, thereby leading to higher pump prices and adding to inflation.”

Newsom, politics and inflation

Walczak understood that temporary relief is politically popular.

“With states sitting on large surpluses while consumers struggle under the burden of high inflation, the political appeal of rebate checks and tax holidays is understandable,” said Walczak.

But he said, “these policies do nothing to solve the underlying problem, and they are poorly targeted as relief for those who need the help most. “

Hannah Gabriel, assistant professor of economics at California State University, Sacramento, had a more measured view.

“If the rebate is spent on gasoline, or other consumable goods that are experiencing high inflation driven by supply costs, then the rebates will likely increase the prices of those goods from increased demand—leading to more inflation,” she said, but added that’s not automatic.

It depends how the money is used. History shows that many households have spent one-time stimulus payments either on fixed costs, such as rent or mortgages, or saved the money.

“If that is also the case with the rebates, then they would not create much inflationary pressure,” Gabriel said.

Gokce Soydemir saw the benefit of a rebate outweighing any major threat to inflation.

“Inflation generally runs higher in the west than nationwide which means cost of living is higher. There is therefore a rationale for rebates on the part of the governor and legislature to help people pay for gasoline and other items,” said the Foster Farms endowed professor of business economics at California State University, Stanislaus

©2022 The Sacramento Bee. Visit sacbee.com. Distributed by Tribune Content Agency, LLC.

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