Will the Inflation Reduction Act actually reduce inflation?

WASHINGTON (AP) — With inflation raging near its highest level in four decades, the House on Friday gave final approval to President Joe Biden’s landmark Inflation Reduction Act. Its title raises a tantalizing question: Will the measure actually tame the price spikes that have inflicted hardships on American households?

Economic analyses of the proposal suggest that the answer is likely no — not anytime soon, anyway.

The legislation, which the Senate passed earlier this week and now heads to the White House for Biden’s signature, won’t directly address some of the main drivers of surging prices — from gas and food to rents and restaurant meals.

Still, the law could save money for some Americans by lessening the cost of prescription drugs for the elderly, extending health insurance subsidies and reducing energy prices. It would also modestly cut the government’s budget deficit, which might slightly lower inflation by the end of this decade.

The nonpartisan Congressional Budget Office concluded last week that the changes would have a “negligible” impact on inflation this year and next. And the University of Pennsylvania’s Penn Wharton Budget Model concluded that, over the next decade, “the impact on inflation is statistically indistinguishable from zero.”

Such forecasts also undercut the arguments that some Republicans, such as House Minority Leader Kevin McCarthy have made, that the bill would “cause inflation,” as McCarthy said in a speech on the House floor last month.

<p>FILE - In this May 10, 2020 file photo, a shopper pushes his cart past a display of packaged meat in a grocery store in southeast Denver. Prices at the wholesale level fell from June to July, the first month-to-month drop in more than two years and a sign that some of the U.S. economy's inflationary pressures cooled last month. Thursday’s report from the Labor Department showed that the producer price index — which measures inflation before it reaches consumers — declined 0.5% in July. (AP Photo/David Zalubowski, File)</p>

David Zalubowski

FILE - In this May 10, 2020 file photo, a shopper pushes his cart past a display of packaged meat in a grocery store in southeast Denver. Prices at the wholesale level fell from June to July, the first month-to-month drop in more than two years and a sign that some of the U.S. economy's inflationary pressures cooled last month. Thursday’s report from the Labor Department showed that the producer price index — which measures inflation before it reaches consumers — declined 0.5% in July. (AP Photo/David Zalubowski, File)

Biden himself, in speaking of the legislation’s effect on inflation, has cautiously referred to potentially lower prices in individual categories rather than to lower inflation as a whole. This week, the president said the bill would “bring down the cost of prescription drugs, health insurance premiums and energy costs.”

At the same time, the White House has trumpeted a letter signed by more than 120 economists, including several Nobel Prize winners and former Treasury secretaries, that asserts that the law’s reduction in the government’s budget deficit — by an estimated $300 billion over the next decade, according to the CBO — would put “downward pressure on inflation.”

In theory, lower deficits can reduce inflation. That’s because lower government spending or higher taxes, which help shrink the deficit, reduce demand in the economy, thereby easing pressure on companies to raise prices.

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