Inflation, Interest Rates, & The Inflation Reduction Act

Inflation:

An economy’s inflation rate is the measure of how much more expensive goods and services have become over a set period of time. There have been several moments in history when the US economy has struggled with inflation, and it is a recurring issue that the federal government continues to face. During the peak of the pandemic, the inflation rate reached around 8.5%, which was the highest it had been since 1982. Since then, a variety of economic changes and efforts have been made, including changes in interest rates, the passing of certain bills, and other monetary policies.

Inflation and Interest Rates:

Currently, a key effort to dampen the effects of inflation is an increase in interest rates. Higher interest rates are a policy response to rising inflation because higher interest rates makes the money-borrowing process more expensive, leading to a decrease in demand. In general, decreases in aggregate demand lead to a lower inflation rate. Starting in February of 2023, the federal government has raised interest rates by around 0.25% almost every month, which has been an effective strategy to moderate inflation.

Inflation Reduction Act:

It has been around a year since the Inflation Reduction Act was passed on August 13th, 2022. Since the implementation of this act, inflation rates have gone down by around 3%, from 6.5% in August 2022, to around 3.3% in August 2023. Considering other economic factors that might be causing fluctuations, it is not clear whether the act is actually the cause of this decline. The act was originally implemented to create two new credit delivery methods: elective pay and transferability, both of which allow government entities to benefit from clean energy tax credits. Other than these additions, the act also aims to lower prescription drug costs, health care costs, make changes in various R&D expeditions, and lower energy costs, aiming to reduce carbon emissions by 40% by the year of 2030. Although these included changes serve as economic benefits, many have questioned this act’s impact on inflation and whether or not there are any direct improvements.

Expected Projections:

Going forward, the inflation rate is expected to drop down to around 2.5-3.0% by the fourth quarter of 2023, which is certainly a green flag for the economy. As the USFG continues to play around with interest rates in order to steady the flow of money in our economy, it is interesting to take a look at the way various bills and policies are impacting inflation.