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With inflation raging near its highest level in four decades, Congress is poised to approve President Joe Biden’s signature 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 is headed for final approval Friday in the House and will then be signed into law, won’t directly address some of the main drivers of surging prices – from gas and food to rents and restaurant meals.
Still, over time, the bill could save money for some Americans by lessening the cost of certain 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.”
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 Novel Prize winners and former Treasury Secretaries, that asserts that the bill’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.
