While price increases have cooled over the past year — the inflation rate has dropped from 9% to 3.2% — most economists say little to none of the drop came from the law.
So why the name? It may ultimately help to hold down prices in the future — and it fit the politics of the moment.
While the law may not have crimped inflation over the past year, it could well do more in that regard going forward, since it just now is starting to be implemented. Along with the CHIPS Act, there are also signs that the Inflation Reduction Act helped to stimulate roughly $500 billion in corporate announcements to invest in new factories.
Biden, on his three-state western swing this past week, emphasized to donors and voters how the law addresses climate change and promotes the creation of jobs as the economy moves toward renewable energy. The Fed aggressively raised its benchmark interest rate, which made it more expensive to borrow and slowed demand that had been pushing up prices. The Fed's rapid hikes have nearly doubled average mortgage rates, pushing down existing home sales. Home prices have also declined slightly in the past year, which can put downward pressure on rental costs. Other interest-rate sensitive industries, particularly autos, have also seen prices fall after sharp increases during the pandemic.
“The big moves in inflation are primarily global shocks,” said Kristin Forbes, an economist at MIT and a former member of the Bank of England’s interest-rate setting committee. “Those are the primary drivers, but not the only ones. What the Fed has done has also contributed, without a doubt.” Tax credits will reduce the cost of installing rooftop solar panels by 30%, which will in turn lower monthly electricity bills. Tax credits also make it more affordable to install a heat pump to control a home's central air, possibly trimming energy bills by $1,000 annually. There are other tax credits for energy efficient doors and windows as well as new insulation.
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