Will the Democrats’ Inflation Reduction Act bring prices down? What the experts say
WASHINGTON — President Joe Biden and congressional Democrats are touting the “Inflation Reduction Act” as their big election year triumph, a major way of getting soaring prices to come down.
But don’t look for any radical plunge in prices anytime soon. In the future, probably, but not now.
The Senate Sunday passed the Democratic-authored spending and tax package called the “Inflation Reduction Act” Sunday. It now goes to the House, which is expected to consider it Friday.
The act includes spending to promote climate change, reduce health care costs and provide consumers with incentives to make their homes more energy efficient. It also includes tax increases on some corporations.
The bill, said Biden, “will cut your cost of living and reduce inflation.” “It’s as plain as the nose on your face that this will reduce inflation,” Senate Majority Chuck Schumer, D-New York, told reporters.
That could be true, said the experts, though not right away.
“It appears that this bill would have very little, if any, immediate impact on inflation. If there is to be any effect on inflation, it would be on a much longer time horizon,” said Hannah Gabriel, assistant professor of economics at California State University, Sacramento.
Other mainstream economists concurred. “We find almost zero effect in the short run,” said Kent Smetters, faculty director of the Penn Wharton Budget Model. In the long run, he said, there could be a slight reduction in the rate of inflation.
“Will it slow inflation, as its title promises? Perhaps, but probably not by very much,” said Howard Gleckman, senior fellow at the nonpartisan Tax Policy Center.
Some economists were more optimistic about future prospects. As its provisions take effect, which could take a few years, “I think it will bring down inflation,” said Mike Konczal, director of Macroeconomic Analysis at the Roosevelt Institute.
Democrats and inflation
Democrats insist the package will help stabilize prices, which as of June had increased 9.1% over the year, the steepest rise in more than 40 years.
Republicans have pounded away at the inflationary spiral, using it as an important weapon against Democrats as the midterm elections approach.
One way Democrats are responding is with legislation. In California, Gov. Gavin Newsom is pushing what he calls an “inflation relief package,”which includes stimulus checks to millions of Californians.
In Washington, party lawmakers are eagerly promoting the “Inflation Reduction Act,” and touting an August 2 letter to congressional leaders signed by 126 economists, including seven Nobel laureates.
“These investments will fight inflation and lower costs for American families while setting the stage for strong, stable, and broadly-shared long-term economic growth,” it says, though it does not mention precisely when inflationary pressure will ease.
What drives prices?
Economists cite a host of reasons why there’s likely to be little relief from the bill before the November election or shortly thereafter.
Prices are driven by supply and demand. The Federal Reserve can dampen demand by raising key interest rates, which it is doing.
Government policymakers have more control over supply by providing tax incentives and authorizing spending, but it takes time for major industries such as housing, automobiles and energy to ramp up.
The bill does provide incentives that could help buoy supply, with credits for electric cars and more efficient energy devices in homes. Such incentives “could have some effect on prices in the medium term,” said Chris Hoene, executive director of the California Budget & Policy Center.
The bill’s goal of reducing energy and health care costs “could eventually lead to a reduction in prices faced by consumers, but it would be several years before any of these gains are realized,” said Gabriel.
The bill does provide price stability for health care premiums for many people, and should drive down some prices for prescription drugs for Medicare beneficiaries. The bill allows the government to negotiate the price of some drugs, and continues federal help for premiums paid by lower and middle income policyholders for three more years.
An uncertain outlook
The problem in saying with any certainty all the bill’s initiatives would have a significant impact on inflation, Smetters said, is that “Inflation has a path that’s not fully predictable.”
Mark Zandi, chief economist at Moody’s Analytics, saw inflation slowing, largely because energy prices are dropping and supply crunches should ease.
But he also found potential reasons that the forecast could change. “We’re assuming energy prices don’t go up,” he said. But “What about if a hurricane blows through the Gulf and wipes out a refinery?”
Assumptions that the COVID pandemic will ease and supply chains will improve, he said, “are very tenuous. What will China do when the next wave of the virus hits?”
Back home, he wondered if the Fed can “calibrate monetary policy just right?”
So when the Democrats boast they’re taming inflation, don’t suddenly look for gasoline prices to plunge or the cost of bread and meat to instantly return to the levels of yore. But help is eventually likely to be on the way.
“It will not happen in the next few years,” said Konczal. But, he added, “In a year or two you could see a real impact.”