Garland County and the city of Hot Springs are expecting more than $30 million over the next year from the $1.9 trillion relief package Congress passed in March.
The Garland County Quorum Court will consider an ordinance Monday night establishing The American Rescue Plan Fund, which will hold the $19.3 million County Judge Darryl Mahoney said the county will receive from ARP's Federal Coronavirus State and Local Fiscal Recovery Fund.
The fund will disburse $130 billion to cities and counties over the next year. Mahoney said the county expects to receive the first half of its payment this week, with the balance paid in May 2022. The county's $19.3 million allocation is about the size of its amended 2021 general fund budget.
City Manager Bill Burrough said Hot Springs is expecting $10.8 million, with the first half due next week and the balance next May. The total payment represents 38% of the $28.6 million 2021 general fund budget the Hot Springs Board of Directors adopted in December.
"We have no plans on use at this time until we receive the rules on eligible expenses," Burrough said. "We do know that shoring up lost revenue is one of the uses, but it's not clear after that. We should be getting additional information very soon."
Localities are waiting for more specific guidance from the U.S. Department of the Treasury, but general guidance issued earlier this year indicated the funds could be used for infrastructure. Localities have until the end of 2024 to spend the funds.
Mahoney said meeting the spend-down deadline will be difficult in regard to infrastructure. The city and county have yet to spend most of the roughly $20 million they received from the $54.6 million bond issue voters approved for road improvements in a 2016 special election. Voters authorized a temporary 0.625% countywide sales tax to secure the Pave It Forward bonds.
"If you were allowed to use it for roads and bridges, you couldn't contract enough people to utilize all of that," Mahoney said. "Everybody is really busy right now. It's difficult to get employees. It's going to be a challenge. The cost of doing business is so high right now."
Mahoney said purchasing power enabled by ARP and the $2.2 trillion Coronavirus Aid, Relief and Economic Security Act Congress passed last year has created inflationary pressures. The relief packages provided billions of dollars to states and localities. Consumers also benefited. According to an analysis by the Committee for a Responsible Federal Budget, the relief packages increased personal incomes by $1.6 trillion from April 2020 to March 2021.
"I think we're seeing inflation right now, more so in some areas than others," Mahoney said. "It's putting pressure on supply. Automobiles, building materials, things like that, are in high demand and low supply. I think they're naming their own price for things right now. I hope we see an end to that, because it certainly creates a precipice to fall off of at some point if things have a correction period."
March's Consumer Price Index, a measure of the average change in prices consumers pay for goods and services, rose 2.6% from the previous March, said Michael R. Pakko, the Arkansas Economic Development Institute's chief economist and state economic forecaster. March's increase translates to a 7.7% annual rate, he said.
Core CPI, which excludes food and energy prices, rose 1.6% in March on a year-over-year basis, with a 4.1% annual rate for the month.
"The other major price index, the Personal Consumption Expenditures Price Index, has shown similar patterns," Pakko said.
Pakko said comparing current prices to last year, when inflation was low and prices for some goods and services declined, can be misleading.
"Take gasoline prices for example," he said. "Gasoline prices in Arkansas rose by over 80% between April 2020 and April 2021. However, gas prices had fallen by nearly 35% during the first four months of 2020. So the comparison of April 2021 with April 2020 shows a huge increase in price, but that would be a misleading measure of 'inflation' defined in terms of longer-term trends in prices."
Pakko said despite the distortion caused by comparing current prices to 2020 prices, when inflation was unusually low, prices pressures are present. Rising prices aren't always a function of increased demand. They can rise when demand is flat and production costs, such as raw materials and labor, increase.
"The underlying seeds of accelerating inflation, in the form of plentiful liquidity in the economy, are evident," Pakko said. "The Federal Reserve has adopted a new policy that seeks to allow inflation to exceed its 2% target for some time to make up for low inflation last year. Concerns about longer-term, accelerating inflation are being downplayed by many economists and policymakers. (They say) recent price pressures are supply-related, or due to temporary surges in consumer spending associated with pent-up demand."
Pakko said even if the causes of rising prices prove temporary, they can have longer-term effects.
"When inflation psychology takes hold there can be a self-fulfilling cycle," he said. "Wages rise to keep up with prices, increasing costs and putting further upward pressure on prices."
Monetary policy can head off inflation, Pakko said, but if the Federal Reserve takes too long to tighten credit it's forced to adopt austere measures. He hopes the central bank won't have to raise interest rates to the levels it did to curb the runaway inflation caused by its inaction in the 1970s. The bench mark interest rose to around 20% in the early 1980s, pricing many consumers out of home and car loans.
"The one clear lesson from history is that ongoing inflation, whether it starts as a cost-push or demand-pull effect on prices, can only become embedded as a trend when the public loses confidence in the monetary authority's ability or willingness to restrict the growth of liquidity in the economy," Pakko said.
"And when inflation expectations become untethered, it becomes all the more difficult to take the policy actions necessary to contain it. That's where we were 40 years ago. I hope we don't see a replay of the late '70s and early '80s, but I am concerned that the conditions are ripe for a similar scenario. ... No one has seemed very interested in thinking about the longer-term consequences of recent policies and economic conditions. The concern has been all about getting through the pandemic."