Stimulus Update: No Relief on the Table Even as Inflation Hits 40-Year High

Living costs keep rising, but Americans shouldn't expect stimulus aid to help.

Given the way living costs have been soaring lately, many experts were anticipating a high reading from the Consumer Price Index (CPI) in June. That index measures changes in the cost of consumer goods, and it's been consistently high this year.

But June's CPI reading actually exceeded economists' expectations -- and that's not a good thing. The index rose 9.1% on an annual basis, which was beyond the 8.8% reading analysts thought they'd see. And that 9.1% reading now marks the fastest pace of inflation in roughly 40 years.

Everything is up

Last month, energy prices rose 41.6% on an annual basis, while shelter costs rose 5.6% annually. But the expense category with the highest increase was gas, which rose almost 60% on an annual basis.

Meanwhile, all of these cost increases are eroding workers' buying power. Real wages fell 3.6% on an annual basis, which indicates that workers are losing money based on how fast living expenses are rising.

What's being done to address inflation?

Many Americans are consistently racking up debt and dipping into their savings to keep up with higher living costs. And at this point, it's imperative that lawmakers do what they can to break this vicious cycle.

But the solution to rampant inflation is not another round of stimulus checks. In fact, a big reason why inflation is so high these days has to do with last year's stimulus policies.

Americans started receiving large windfalls under March of 2021's American Rescue Plan at a time when supply chains were starting to get seriously bottlenecked. That created an imbalance between supply and demand that's still impacting consumers to this day.

If lawmakers pump even more money into the economy via another stimulus round, it will likely only worsen the problem of inflation rather than make it better. And so Americans should not expect stimulus checks to hit their bank accounts anytime soon.

Instead, the Federal Reserve is hoping to slow the pace of inflation by moving forward with interest rate hikes. The Fed doesn't set consumer interest rates directly, but rather, oversees the federal funds rate, which is what banks charge each other for short-term borrowing. However, when the federal funds rate increases, consumer borrowing rates tend to follow suit.

The logic is that if it gets too expensive for consumers to finance purchases via loans or credit card balances, they'll start to spend less. And once that happens, it should narrow the gap between supply and demand.

It's a reasonable tactic to employ, though the fear is that if consumer spending halts to too extreme a degree, it will spur an economic recession. But at this point, that's a risk the Fed may need to take.

It's clear that inflation isn't going to just slow down on its own. And consumers can only take so many more months of sky-high living costs, especially at a time when many have not yet even managed to recover from the financial blow the pandemic dealt them in its earlier stages.