Inflation Reduction Act unlikely to have much effect on inflation, analysts say

Senate majority leader Chuck Schumer celebrated after the Inflation Reduction Act was passed by the Senate.Drew Angerer/Getty

WASHINGTON — To finally push some of their environmental and social spending priorities through the Senate, Democrats had to retool President Biden’s sweeping Build Back Better legislation, scaling back its scope, slashing its price tag, and rechristening it the Inflation Reduction Act.

The bill that narrowly passed over the weekend still boasts tens of billions of dollars to combat climate change, policy changes to lower prescription drug costs, and new efforts to curb tax avoidance by large corporations.

But when it comes to living up to its new name, the Inflation Reduction Act, which is expected to pass the House on Friday, might run into a problem. Economic analyses have found its cost savings and modest deficit reduction will have little immediate impact on the nation’s alarmingly high inflation rate, and make just a marginal difference longer term.

“For the typical American household, this isn’t going to move the dial on inflation in any meaningful respect, at least not anytime in the near future,” said Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm. Inflation eased in July, with the Consumer Price Index declining to a still historically elevated 8.5 percent over the previous 12 months, the Labor Department reported Wednesday.

The nonpartisan Congressional Budget Office said the bill would have a “negligible effect” on inflation this year and could nudge inflation slightly up or down next year. And the Wharton School of the University of Pennsylvania estimates the legislation would “very slightly” increase inflation until 2024 and then lead to a small decrease afterward, although the overall impact is “statistically indistinguishable from zero.”

“This is really not going to have any impact” on the inflation rate, said Kent Smetters, the faculty director for the Penn Wharton Budget Model.

The bill contains some provisions that will stimulate spending by Americans and increase inflation, such as an extension of government health care subsidies. Those would be offset by measures that would reduce spending, like a new minimum corporate tax that likely would lead companies to pull back on purchases, he said.

The bill was rebranded after Senator Joe Manchin, a centrist West Virginia Democrat, scuttled the original Build Back Better package last year, citing his concerns about soaring inflation. “Driving down inflation was my number one goal,” he said last month after striking a deal with Senate majority leader Chuck Schumer that dramatically reduced the cost in the renamed bill from last year’s $1.75 trillion.

The smaller price tag and the decision to funnel about $300 billion in new revenue to deficit reduction instead of new spending eased Manchin’s concerns that the bill would fuel inflation. The Inflation Reduction Act will raise about $740 billion over 10 years, through a new minimum corporate tax, increased IRS enforcement, and other measures, according to Senate Democrats. The bill will spend about $430 billion on climate change and health provisions.

Senator Bernie Sanders, a Vermont independent who voted for the bill when it narrowly passed the Senate on Sunday, criticized the Democrats’ inflation branding. During Senate debate over the weekend he referred to the legislation, which excluded many of his spending priorities that were in the original Build Back Better bill, as “the so-called Inflation Reduction Act” because of its minimal impact on inflation.

That echoed criticism by Senate minority leader Mitch McConnell, a Kentucky Republican, and other members of his party, who suggested Democrats were duping voters with the bill’s name. Senator John Barrasso of Wyoming said the legislation was more likely to lead to “double-digit inflation” than reduce it, apparently ignoring the independent analyses that suggest the bill will not affect inflation much at all. Senator Marco Rubio said Democrats came up with the bill’s name because “they see hard-working, everyday Americans as a bunch of uneducated simpletons.” And Senator John Cornyn of Texas said voters would assess the impact of the “misleading-labeled bill” at the polls this fall.

“There will be a comparison by voters in November with, ‘OK, they told us that if we pass this bill, it would reduce inflation, and let’s see what inflation looks like in November of 2022,’ ” Cornyn said during the Senate debate. “No amount of spin or fast talking can conceal the damage this bill will inflict on the American people.”

But congressional Democrats and Biden administration officials argue that the short-term impact on inflation isn’t the right barometer given that the bill will bring down household expenses and lower the budget deficit in the long term. They include a $2,000 annual cap on out-of-pocket prescription drug costs for Medicare recipients starting in 2025, lower prescription drug costs due to Medicare being allowed to negotiate some prices starting in 2026, and savings to families from new and extended tax credits for electric vehicles and energy-efficient heating and cooling systems.

“We’re very focused on what the Inflation Reduction Act means for family budgets. Some of that you get in the monthly inflation index, much of it you don’t,” said Jared Bernstein, a member of Biden’s Council of Economic Advisers. “If you’re someone who is spending $10,000 out of pocket on your cancer treatment and now you’re going to spend $2,000, I would argue that person will very much confirm our view that calling this the Inflation Reduction Act is pretty much on target.”

Still, Biden acknowledged Monday that some of those policies will take time to be implemented and felt by Americans.

“There’s a whole range of things that are really game-changing for ordinary folks,” he said. “Now, some of it is not going to kick in for a little bit, but it’s all good.”

Congress sometimes christens bills with names designed to appeal to voters. President Donald Trump’s major legislative accomplishment was the Tax Cuts and Jobs Act, passed in 2017 with no Democratic support. The legislation did cut taxes, but a 2021 study by the Brookings Institution think tank found that job growth slowed in the two years after it took effect.

A wide range of economists, including seven Nobel Prize winners, have publicly supported the Inflation Reduction Act, as has a bipartisan group of former Treasury secretaries that included Lawrence Summers, who last year warned that Biden’s $1.9 trillion American Rescue Plan could trigger high inflation because it pumped too much stimulus into the economy that was not offset by tax increases or other revenue.

“This legislation will help increase American competitiveness, address our climate crisis, lower costs for families, and fight inflation — and should be passed immediately by Congress,” said the Treasury secretaries’ statement. Part of their argument was that the Inflation Reduction Act’s spending is more than offset by tax increases, which means it will reduce the deficit, and lower inflation over the long term.

“I think it has the right design and will reduce inflation,” said Harvard economist Jason Furman, who was chair of President Barack Obama’s Council of Economic Advisers and supports the legislation. But, he added, “I don’t think the act is optimized around inflation reduction.”

Zandi said Democrats were technically correct in saying the bill would reduce inflation because his analysis found it would do so modestly over 10 years. But he declined to comment on whether the legislation’s new name was appropriate given that inflation reduction was only a small part of the bill.

“It’s true to its name. It does reduce inflation, but very much on the margins,” he said. “If you’re going to like or dislike this legislation, it really should be based on what you think of the other provisions.”