The Inflation Reduction Law may have little impact on price increases: why and how it affects you

Food prices had an increase of 13.1% in July, above the 8.5% annual inflation, which has represented a heavy blow to consumer budgets.

Photo: Brandon Bell/Getty Images

Amid inflation at its highest level in four decades, Congress on Friday gave its final approval to the historic Inflation Reduction Act of President Joe Biden. Although experts point out that, despite its name, the measure is not expected to dominate the increase in prices in the short term.

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

This is because the legislation will not directly address some of the main drivers of price increases, from gas and groceries to rent and restaurant meals.

Even so, law could save money for some Americans by lowering the cost of prescription drugs for the elderly, extending health insurance subsidies, and lowering energy prices.

It would also modestly reduce the government’s budget deficit, which could slightly reduce inflation by the end of this decade.

Biden himself, in discussing the legislation’s effect on inflation, has cautiously referred to potentially lower prices in individual categories rather than reducing inflation as a whole.

A lower deficit to lower inflation

The White House has published a letter signed by more than 120 economists which claims that the law’s reduction in the government’s budget deficit, by an estimated $300 billion over the next decade, would put “downward pressure on inflation.”

Lower deficits can reduce inflation. That’s because lower government spending or higher taxes, which help reduce the deficit, reduce demand in the economy and thus relieve pressure on companies to raise prices.

However, other experts point out that the lower deficits will not be felt for another five years and will not be very large in the future.

How it is reflected in homes

While the law could have the benefit of increasing savings for millions of households on pharmaceutical and energy costs, unlikely to have much effect on headline inflation.

Prescription drugs represent only 1% of spending in the consumer price index and spending on electricity and natural gas represents only 3.6%.

Starting in 2025, the law will limit the amount that Medicare beneficiaries would pay for their prescription drugs at $2,000 a year.

Also would limit insulin costs of Medicare beneficiaries at $35 per month. Insulin prescriptions averaged $54 in 2020, according to the Kaiser Family Foundation.

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