Inflation Reduction Act 2023: Why Inflation Hasn't Dropped Yet and What to Expect

Diccon Hyatt is a seasoned financial and economic journalist who has extensively covered pandemic-era economic developments. With hundreds of articles simplifying complex financial topics, he focuses on how economic changes affect personal finances and markets. His experience includes work at U.S. 1, Community News Service, and the Middletown Transcript.

Essential Insights

• Economists agree inflation has eased over the past year mainly due to supply chain recovery and Federal Reserve interest rate hikes, not the Inflation Reduction Act (IRA).
• Improvements in global logistics and monetary policy tightening have been key in slowing consumer price increases since mid-2022.
• The IRA holds potential to reduce inflation in the long term by boosting productivity and decreasing oil dependence.

Enacted on August 16, 2022, the Inflation Reduction Act introduced significant tax reforms, empowered Medicare to negotiate drug prices, enhanced IRS funding for enforcement and service, and incentivized green energy adoption. Although inflation dropped from 8.3% to 3.2% annually since then, economists attribute this primarily to broader economic forces rather than the IRA itself.

Mark Zandi, chief economist at Moody’s Analytics, emphasized that the IRA had minimal influence on recent inflation trends. Instead, easing pandemic disruptions in supply chains and the geopolitical effects of the Ukraine conflict on oil and commodity prices played a larger role.

Experts largely credit supply chain normalization and the Federal Reserve's aggressive interest rate increases—reaching levels not seen since 2001—for curbing inflation, rather than legislative measures like the IRA.

Understanding Inflation's Fluctuations

The COVID-19 pandemic disrupted manufacturing and logistics worldwide, causing shortages and price surges. The 2022 Russian invasion of Ukraine further strained oil supplies, driving energy prices higher.

According to Federal Reserve Bank of San Francisco economists, supply chain issues accounted for approximately 60% of the consumer price increases since 2021. As these issues resolved, inflation pressures eased.

The Federal Reserve's policy shift from near-zero interest rates to multiple hikes since March 2022 increased borrowing costs, dampening spending and balancing supply and demand.

Analysts like those at Allianz attribute about half of the inflation reduction since summer 2022 to these monetary policy adjustments.

Notably, the Congressional Budget Office predicted the IRA would have negligible short-term impact on inflation before its passage.

Why Name It the Inflation Reduction Act?

Originally part of the broader Build Back Better plan, the IRA was a downsized version focusing on energy and tax reforms after social program provisions were removed due to Senate opposition, particularly from Senator Joe Manchin, who was concerned about debt and inflation risks.

Long-Term Inflation Benefits of the IRA

Starting in 2025 and 2026, Medicare beneficiaries will benefit from drug price negotiations and caps on out-of-pocket costs, potentially saving money. However, pharmaceuticals make up less than 1% of the Consumer Price Index, so these savings won't significantly affect overall inflation.

The IRA’s green energy incentives, such as up to $7,500 tax credits for electric vehicle purchases, could reduce gasoline demand, lowering oil price volatility—a major driver of past recessions.

Investments in infrastructure and technology, combined with other recent legislation like the CHIPS Act and Bipartisan Infrastructure Law, aim to enhance economic productivity and resilience, which can help control inflation over time.

Mark Zandi notes that these combined efforts will strengthen the economy’s ability to withstand geopolitical shocks and help keep inflation in check in the long run.

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