How the Inflation Reduction Act does — and doesn't — reduce inflation

• The Inflation Reduction Act aims to cool the US's rampant price growth, but expect its effects to be limited.
• Drug-price negotiation and clean-energy rebates will lower costs for millions of Americans through 2031.

Depending on who you listen to, the Inflation Reduction Act is either a panacea for the country's year-long price surge or a wasteful spending plan that'll do little to cool inflation.

Neither side of the debate is entirely wrong.

Senate Democrats passed their party's large-scale economic plan on Sunday, teeing up the measure for House approval and a signature from President Joe Biden. The package includes funding for clean-energy projects, lowering the cost of prescription drugs, and improving IRS enforcement. It also aims to counter high inflation by paying down the federal budget deficit by taxing profitable firms that currently pay nothing to the government.

The bill's passage hinged on its inflation-fighting features. Sen. Joe Manchin of West Virginia — the holdout Democrat who blocked his party's previous spending proposals — only backed the package once he and Senate Minority Leader Chuck Schumer shifted the plan's focus to cooling price growth.

Yet different analyses of the IRA offer different forecasts for where — and when — the plan will actually cool inflation.

Drug costs and energy prices will show the biggest differences

Analysts largely agree on where the bulk of the IRA's inflation relief will show up. The plan allows Medicare to negotiate drug prices with pharmaceutical companies for the first time, opening the door for millions of Americans to enjoy significantly lower costs for crucial medicine.

"To seniors who've faced the indignity of rationing medications or skipping them altogether, this bill is for you," Schumer said on the Senate floor soon after the IRA's passage on Sunday.

Drug-price negotiation will also put downward pressure on inflation by cutting down on the government's budget deficit. The measure will cut $3 billion from the deficit in fiscal 2023 and another $2 billion from the following fiscal year, according to the nonpartisan Congressional Budget Office.

Cutting the government's spending lowers overall demand in the economy, as there's less cash moving throughout the system. As such, the drug-price-negotiation measure eases both upfront costs for Americans and inflation pressures throughout the economy, the Committee for a Responsible Federal Budget said in its own analysis.

The IRA's 15% minimum tax on profitable corporations achieves a similar effect, the CBO said in a letter to Sen. Lindsay Graham. The tax is the IRA's single-largest deficit reducer and makes up for much of the bill's spending measures.

Energy reforms in the IRA are also set to pull inflation lower in the coming years. Funding for renewable energy and energy efficiency technologies can lower the average household's energy costs by more than $300 per year once their effects are fully felt later in the decade, economists at Moody's Analytics said last week. Various tax rebates, such as those for electric vehicles and roof-installed solar panels, will also lower costs.

Relief is years away — and some new taxes could keep inflation high

The IRA is set to reach Biden's desk in a matter of days, but many of its inflation-fighting effects won't be felt for some time. The package won't have a significant effect on overall inflation until halfway through the decade, the team at Moody's said, as the new corporate taxes and other deficit reducers will take time to slow growth.

Drug-price negotiation won't start until 2026 as well, further delaying the downward pressure it will ultimately place on inflation. The IRA's impact will become "more meaningful later in the decade" as those measures and others go into effect, Moody's said.

Other analysts don't see the IRA having any significant effect at all on inflation. The package will produce "a very small increase in inflation for the first few years" due to government spending on extended Obamacare subsidies and climate projects, according to the Penn Wharton Budget Model, a research initiative at the University of Pennsylvania's Wharton School.

The IRA will then lower overall inflation by a quarter of a percentage point by the late 2020s. The estimates are so close to zero, however, that the model indicates "a very low level of confidence" that Democrats' plan will have any impact on inflation.

A small tax revived in the IRA could even saddle Americans with higher prices in the near-term, the conservative advocacy group Americans for Tax Reform said in an August 1 statement. The IRA reinstates a 16.4-cents-per-barrel fee on crude oil and other petroleum imports that aims to pay for the cleaning of hazardous waste sites. Yet the tax "will be paid by consumers in the form of higher gas and energy costs," ATR said.

The bill's relief, then, likely won't be felt for some time. Yet with gas prices still falling and overall inflation expected to have cooled through July, Americans might not even notice.