Economists: Inflation Reduction Act, Not a Significant Contributor to Inflation Reduction

**The Inflation Reduction Act: A Year in Review**

**The Inflation Reduction Act’s Limited Impact on Inflation**

One year since its enactment, the Inflation Reduction Act (IRA) has not shown significant influence on curbing inflation rates. While the inflation rate dropped from 9% to 3.2% over the past year, economists assert that factors other than the IRA were primarily responsible for this decline. Harvard University economist Jason Furman states that he cannot identify any mechanism by which the IRA would have driven down inflation. However, the law may still have potential in lowering electricity bills in the future. Alex Arnon, an economic and budget analyst for the University of Pennsylvania’s Penn Wharton Budget Model, supports this notion, claiming that the IRA has not played a significant role in reducing inflation. The Congressional Budget Office also predicted that the IRA’s impact on inflation would be negligible.

**Naming the IRA: A Political Move**

Surprisingly, the IRA was named with the intention of holding down prices in the future rather than as a strategy for immediate price reduction. The law’s name, proposed by Democratic Senator Joe Manchin of West Virginia and Senate Majority Leader Chuck Schumer of New York, emerged during private talks about President Joe Biden’s agenda. It capitalized on the rising public concern about escalating consumer prices, which were at their highest in four decades at the time. Despite the law’s deviation from its inflation-reducing objective, it has become a focal point of Biden’s pitch to voters as he enters the 2024 presidential campaign. However, with inflation becoming less of a pressing concern, the president is now emphasizing the law’s provisions related to climate change, job creation, and healthcare cost reduction. In hindsight, Biden himself expressed regret about the law’s name, acknowledging that it aligns more with generating economic growth and providing alternatives to meet basic needs rather than directly addressing inflation.

**The Potential Impact of the IRA**

Although the IRA did not immediately decrease inflation, its implementation is beginning to take hold, and it may have a greater impact on curbing inflation moving forward. Additionally, the law, along with the CHIPS Act, has stimulated approximately $500 billion in corporate announcements to invest in new factories. This influx of investment has helped to strengthen the job market, even amid concerns that inflation could push the United States into a recession. However, contrary to Republican claims that the IRA would lead to higher inflation, the rate actually fell over the past year. The decline in inflation can be attributed to several factors including falling oil and gasoline prices, the Federal Reserve’s aggressive raising of the benchmark interest rate, and the resolution of supply chain issues that arose during the pandemic.

**Reasons for the Decline in Inflation**

Economists attribute the decline in inflation to three main factors. Firstly, oil and gasoline prices have fallen from their peak last year. The price of gas rose by 60% in June 2022 due to Russia’s invasion of Ukraine, but it gradually decreased until January when it began to climb again. Secondly, the Federal Reserve’s continuous increase in the benchmark interest rate has made borrowing more expensive and consequently slowed down the demand that was causing price hikes. This has had a particularly notable impact on the housing market, with mortgage rates almost doubling and existing home sales decreasing. Home prices also experienced a slight decline, putting downward pressure on rental costs. Lastly, the supply chain disruptions that occurred during the pandemic have gradually been resolved, resulting in a decrease in shipping costs. The Federal Reserve Bank of New York’s index measuring supply chain difficulties has fallen below pre-pandemic levels, further contributing to the decline in inflation.

**Addressing Criticisms of the IRA’s Impact**

Despite criticism from Republican lawmakers and some economists regarding the excessive spending associated with the $1.9 trillion pandemic relief, this additional expenditure does not appear to have had a lasting impact on inflation. Experts argue that the primary drivers of inflation are global shocks such as oil price fluctuations, although the actions taken by the Federal Reserve have also played a role. Biden administration officials assert that their actions have contributed to lower inflation. For example, the release of oil from the U.S. strategic reserve alleviated the financial burden at the gas pump. The administration also established a task force to improve port activity and supply chains. By remaining silent on Fed rate hikes, the White House allowed the central bank to work independently without political pressure. While Biden refrains from declaring outright victory against inflation, the White House highlights the cost savings that will result from the IRA’s implementation. The law includes tax credits that will reduce the cost of installing rooftop solar panels and make it more affordable to install heat pumps, leading to lower electricity bills. Tax credits are also available for energy-efficient doors, windows, and insulation, while electric utilities using renewable energy tax credits will pass on savings of approximately $8.2 billion to their customers. Additionally, a $7,500 tax credit is provided to help offset the costs of purchasing a new electric vehicle. The IRA also incorporates measures related to healthcare, capping the monthly cost of insulin for Medicare recipients at $35 and limiting out-of-pocket prescription drug costs to $2,000 starting in 2025. The Congressional Budget Office estimated that these provisions would reduce personal costs for Medicare Part D enrollees by $25 billion in 2031.

**The Future Impact of the IRA**

Collectively, the measures within the IRA have the potential to protect the U.S. economy from rising oil prices and supply chain disruptions, which were major contributors to recent inflation. Economists believe that the law’s focus on reducing dependence on fossil fuels will strengthen the economy and reduce vulnerability to future spikes in oil prices, which have historically led to recessions. Despite initial skepticism regarding its impact on inflation, the IRA holds promise in addressing climate change, creating jobs, and making basic needs more affordable for the American population.

**In Conclusion**

Although the IRA did not provide immediate relief from inflation, its potential lies in its long-term impact. By acknowledging the factors that contributed to declining inflation rates over the past year, economists have identified the IRA’s limited influence. However, they recognize the potential of the law’s provisions in curbing inflation moving forward. The IRA’s impact stems from its focus on reducing reliance on fossil fuels, supporting renewable energy, and providing cost-saving measures for the American public related to electricity bills, healthcare, and energy-efficient products. The law’s true impact will be revealed as it continues to be implemented and its provisions take effect.

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