ANBLEs say the Inflation Reduction Act has not significantly reduced inflation.

ANBLEs say the Inflation Reduction Act has not significantly reduced inflation.

The Inflation Reduction Act: A Closer Look at its Impact on Inflation and the Economy

Image Source: (Link)

Over the past year, the inflation rate has dropped from a staggering 9% to a much more manageable 3.2%. However, most experts have little faith that the Inflation Reduction Act (IRA) played a significant role in this decline. Harvard University ANBLE Jason Furman pointed out that there is no clear mechanism by which the IRA would have brought down inflation to date, although he acknowledged that it could eventually help lower electricity bills. According to Alex Arnon, an economic and budget analyst for the University of Pennsylvania’s Penn Wharton Budget Model, other factors have primarily contributed to the drop in inflation, making the IRA less significant. It comes as no surprise, as the Congressional Budget Office had previously stated that the law’s impact on inflation would be “negligible.”

So why the name? The law’s title, Inflation Reduction Act, was chosen to fit the moment and the political climate. It was proposed when the American public was grappling with the fastest climbing consumer prices in four decades. Democratic Senator Joe Manchin of West Virginia and Senate Majority Leader Chuck Schumer of New York agreed on the name after private discussions about President Biden’s agenda. At that time, Biden assured the public that the law would help “reduce inflationary pressures.” However, with inflation becoming less of an immediate concern, the president is now shifting the focus towards the law’s provisions to combat climate change, create jobs, and lower healthcare costs.

While the IRA may not have immediately reduced inflation, experts believe that as the law begins to be implemented, it could have a more significant impact in the future. In fact, there are already signs that the IRA, along with the CHIPS Act, has stimulated approximately $500 billion in corporate announcements aimed at investing in new factories. This, in turn, has strengthened the job market, countering concerns that efforts to bring down inflation could push the United States into a recession.

Furthermore, despite initial GOP claims that the IRA would cause prices to skyrocket, it has not contributed to any explosive upward price movements. House Speaker Kevin McCarthy, a Republican from California, predicted that Biden’s agenda would push inflation higher, only for the rate to fall over the past year. This further undermines the argument that the IRA has had a detrimental effect on inflation.

During his recent three-state western swing, President Biden highlighted the law’s contributions to the fight against climate change and job creation through renewable energy. He emphasized that the IRA represents an unprecedented investment of $368 billion in climate change initiatives, unmatched anywhere in the world. Biden proudly explained, “It has nothing to do with inflation.” He also highlighted the positive outcomes that are beginning to take hold as a result of the law’s implementation.

With the IRA seemingly out of the running for managing inflation, what were the actual drivers behind its decline? ANBLEs have identified three significant reasons:

  1. Falling Oil and Gasoline Prices: In June 2022, gas prices spiked by 60% compared to the previous year due, in part, to Russia’s invasion of Ukraine. However, gas prices steadily fell until January, when they began to climb again without reaching their earlier peak. The reduction in oil and gasoline prices contributed to the decline in inflation.

  2. Fed Policy: The Federal Reserve aggressively raised its benchmark interest rate, making borrowing more expensive and curbing demand, which had been driving prices upward. The Fed’s rapid rate hikes have nearly doubled average mortgage rates, causing a decline in existing home sales. Additionally, interest-rate sensitive industries like automobiles also experienced price decreases after the sharp increases observed during the pandemic.

  3. Improved Supply Chains: The kinks in supply chains that caused shortages during the pandemic have gradually been resolved. The Federal Reserve Bank of New York’s measure of supply chain difficulties has fallen below pre-pandemic levels as shipping costs decreased. These smoother supply chains helped alleviate inflationary pressures.

Republican lawmakers and some ANBLEs previously attributed high inflation to the administration’s $1.9 trillion pandemic relief, suggesting it was excessive. However, any impact of the relief package on inflation appears to have dissipated.

Biden administration officials argue that their actions have also played a role in lowering inflation. For instance, by releasing oil from the U.S. strategic reserve, they claim to have reduced the financial burden at the gas pump. The administration has also created a task force to improve U.S. port activity and supply chains, contributing to stability in the economy. Moreover, their silence on the Federal Reserve’s rate hikes has allowed the central bank to operate independently without political pressure.

However, while the inflation numbers have improved, the White House remains cautious about declaring a complete victory against inflation. The cost savings from the Inflation Reduction Act are starting to materialize as the law is being enacted. For example, tax credits offered by the law can significantly reduce the cost of installing rooftop solar panels and make heat pumps for central air conditioning more affordable. Additional tax credits apply to energy-efficient doors, windows, and insulation. Electric utility companies using the tax credits for renewable energy are expected to provide approximately $8.2 billion in savings to their customers. Moreover, individuals can offset the cost of purchasing new electric vehicles with a $7,500 tax credit.

The law also includes healthcare-related provisions. Medicare recipients can expect their monthly insulin costs to be capped at $35, while starting in 2025, there will be a $2,000 limit on out-of-pocket prescription drug expenses for 19 million Medicare beneficiaries, saving them an average of $400 annually. The Congressional Budget Office estimates that those enrolled in Medicare Part D will experience personal cost reductions of $25 billion by 2031.

By protecting the U.S. economy against rising oil costs and addressing supply chain challenges, the Inflation Reduction Act aims to create a more resilient economy with reduced exposure to oil price fluctuations. Mark Zandi, the chief ANBLE at Moody’s Analytics, believes that the law will be a significant positive in the long run, ultimately reducing the economy’s reliance on fossil fuels and making it less vulnerable to oil-related recessions.

In conclusion, while the Inflation Reduction Act did not have an immediate impact on inflation, its provisions are beginning to take effect and are expected to provide cost savings in various sectors. As the law is fully implemented, it may play a more significant role in managing inflation and contributing to a stronger economy.