Page 13 - NBIZ October 2021

A little inflation is good for the economy: it drives Nearly 85 percent of U.S. households received stimulus
consum ers to buy now to avoid higher prices later. That checks during the pandemic. According to the Peter G.
boosts de mand, but not so much that production and Pe ter son Foundation, the typical household spent three-
wages can’t keep up. Stores, restaurants, and factories fourths of their first check and saved or paid down debt
hire additional work ers to meet that increase. It creates with the rest. By the time the third check arrived, con-
what economists refer to as a “virtuous cycle”, boosting sumers spent less than 20 percent and saved or paid down
economic growth, which leads to businesses hiring addi- debt with the remainder.
tional workers, which leads to more growth. The optimum
rate in the U.S. ap pears to be around 2.0 percent, which HOW RECIPIENTS USED STIMULUS CHECKS
the Fed has set as its long-term inflation target.
Inflation is a problem when it persistently exceeds 4.0
per cent. Consumers buy more than they need, stocking
up now to avoid higher prices later. The boost in de mand
compels producers to raise prices. Pay raises lag price
hikes and consumer purchasing power slowly erodes.
Inflation above 10.0 percent is a serious problem.
Money loses value so rapidly that the pay raises can’t keep
up. Businesses, unable to forecast costs, struggle to price
their goods and services. Consumers rush to spend their
paychecks to get ahead of the next round of inflation.
There’s no incentive to save since any return is eaten up by
inflation. The economy enters an inflation spiral that can’t
be halted without significant pain and hardship.
The U.S. last experienced double-digit inflation in the
1970s and early-1980s, the delayed effect of two oil price
shocks: U.S. government spending on the Vietnam War The share of households with subprime credit scores
and on programs initiated under President Johnson’s has steadily shrunk since the end of the Great Recession,
“Great So ciety”. Inflation peaked at 14.6 percent in but the trend accelerated during the pandemic as house-
March 1980. The Fed raised interest rates to near 20 holds used their stimulus checks to pay down debt. The
percent, and the U.S. suffered through two recessions, share of Houston consumers with subprime credit scores
where one in ten workers lost their jobs before inflation is at its lowest level in records dating back to 1999.
was brought under control.
The seeds of the current bout of inflation were sown % POPULATION WITH SUBPRIME CREDIT SCORE
early in the pandemic. Consumers, unable to travel, dine Three Most Populous Houston-Area Counties*
out, attend concerts, or cheer at sporting events saved
20 to 30 percent of their paychecks, three to four times
the normal rate. Fear of losing one’s job was also a great
motivator to pare spending and build a nest egg.

PERSONAL SAVINGS RATE

35
30
25
Percent 20

15
Sources: Equifax; Federal Reserve Bank of New York
10
5
'17 '18 '19 '20 '21 '22 Consumers now find them selves flush with cash and a
sig nificant amount of credit and are eager to spend, which
Source: U.S. Bureau of Economic Analysis
is a major factor driving up prices.
Merchants and manufacturers responded to the March-
April ’20 collapse as they do with any recession. They

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