Inflation Reduction Act Won't Curb Inflation ‘Over the Short Run,' Says Economist

Ken Cedeno | Reuters

Democratic lawmakers celebrated on Sunday as the Senate narrowly passed sweeping economic and climate change legislation following a 51-50 party-line vote. The bill, called the Inflation Reduction Act, now heads to the House where it's expected to pass, and then likely on to President Joe Biden's desk for signing.  

Although the bill has "inflation reduction" right there in the title, its policies are unlikely to put a lid on rising prices in the near future, says Bill Adams, chief economist for Comerica Bank. "Over the short run, fluctuations in energy, food and housing prices will set what happens to inflation this year," he says.

The legislation authorizes $430 billion in spending, the bulk of which — $300 billion — is earmarked for investments to curb climate change and boost clean energy.

The bill also allows Medicare to negotiate prices with drug companies for certain expensive drugs, theoretically reducing prescription costs for seniors, and extends Affordable Care Act subsidies to negate a planned 2023 hike in insurance premiums.

Helping to fund the changes are a 15% minimum tax on large corporations and an excise tax on companies that repurchase shares of their own stock.

Will the bill actually fight inflation? It could over the long term

The task of reducing inflation over the short term falls largely to the Federal Reserve, which has embarked on a series of interest rate hikes aimed at cooling rising costs. By making it more expensive to borrow money, the thinking goes, the Fed can slow the consumer spending that propels the economy.

The Fed's moves have a gradual effect on inflation, economists say, but for consumers, some side-effects are more immediate: Borrowers pay more for loans, such as mortgages, and to run balances on their credit cards.

Although the new bill doesn't take nearly as targeted of an approach to fighting inflation, it does aim to reduce the prices consumers pay in one key area: health care. "Health-care costs are an important driver of inflation in this country," says Adams, adding that the U.S. is unique among developed economies in the amount it spends on health care compared to the outcomes its citizens receive.

"From a 35,000-foot view, controlling health-care cost increases can bring down inflation over the next three to five years," he says.

In addition to letting Medicare negotiate drug prices on behalf of consumers, the bill limits out-of-pocket prescription costs for Medicare beneficiaries to $2,000 per year. And if drug companies raise prices faster than inflation, they'll owe rebates to Medicare — presumably a deterrent to the sort of price hikes that can cripple the budgets of older Americans.  

Still, opponents of the bill say that authorizing a huge spending bill will add to inflation rather than combatting it.

"Naming it 'anti-inflation' is a joke," Kevin O'Leary, chairman of O'Shares ETFs and judge on CNBC's "Money Court," told CNBC's Squawk Box on Monday. "This is going to be very inflationary almost immediately because we're printing billions of dollars."

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