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Harnessing a runaway train:The Inflation Reduction Act, rising interest rates, and what it all mean

Inflation. It’s the new “COVID-19.” “Unprecedented.” “Great Recession.” One cannot escape the word and, moreover, what it means to our budgets and households. However, with the November 10 release of the U.S. Bureau of Labor Statistics Consumer Price Index figures, it seems some clouds may finally be parting.

The index, which measures changes in prices paid by consumers for goods and services, is a barometer of spending patterns. The release noted that the CPI for all items had ticked up by .4% in October over September. The items accounted for in this index span food, energy, shelter, medical care, household furnishings, new vehicles, personal care, and other goods and services for day-to-day living. Notably, the 12-month increase (at 7.7%) was the smallest YoY gain for the CPI since January 2022.

Furthermore, the realized increases were less than what analysts has reportedly expected. The prognosticators had expected a 7.9% YoY increase in October, down from the 8.2% for the year (as of the month prior, in September).

So, what does all of this mean? For you? Your paycheck? Nest egg?

It is essential to appreciate inflation and related metrics as the sum of many different parts. As indicated by the abundance of analyses following the aforementioned news release, these findings are offering early evidence to support the notion that the Fed’s lifting of interest rates (from pretty much nil to almost 4%) is working to harness breakneck inflation. Intentional slowing of demand, in theory, gives supplies an opportunity to catch up.

At the time of this writing, during the central bank’s most recent policy meeting in early November, Fed leadership had recommitted to “staying the course” when it comes to curbing inflation. It was reported that there was still “some ground to cover” before the rate reached an adequately restrictive level to slow inflation and to provide sustained relief for consumers. The Fed’s long-term target is 2%. As noted by the bank, this annual percentage change in prices for consumer expenses is “most consistent” with the Fed’s “mandate for maximum employment and price stability.”

The Fed continued: “When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy. For many years, inflation in the United States has run below the Federal Reserve’s 2 percent goal. It is understandable that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes. At the same time, inflation that is too low can weaken the economy.”

Additionally, when back-tracking to factors that contribute to inflation and households’ financial health, there are other policy matters aside from the Fed’s actions. Legislation may be aimed at easing the pressures caused by out-of-control inflation. The Inflation Reduction Act, signed into law this summer, was enacted to tackle the deficit, wrangle the prices of prescriptions, and invest in Stateside energy production, especially clean energy efforts. The full language of the law can be found here.

Indeed, the efforts and potential effects of the IRA echo some of the key areas that are affected by inflation’s ups and downs. These areas largely include:

  • Social Security, as cost-of-living adjustments are supposed to be designed to help benefits keep up with inflation – or the continual and rising costs of goods and services

  • Food prices, as restaurants have passed the inflation-driven increases in the costs of ingredients and supplies on to the consumer. And, despite a sunnier picture, the most recent CPI for food (both at-home groceries and away-from-home dining) far surpassed the index numbers for most other goods and services that are tracked each month and year-to-date. The YoY gain stood at almost 11% as of October.

  • Taxes, the Internal Revenue Service inflation adjustments for 2023 may ease tax bills for taxpayers by pushing them into lower tax brackets.

  • Earnings, those paychecks simply don’t stretch as far. One has comparatively lackluster buying power. And, even if you do get a well-deserved raise that does not push you into a higher tax bracket (see above), more of your income will go toward the same volume of goods and services that you have always depended on just to get by.

Speaking of earnings, as part of the Inflation Reduction Act, provisions are underway to spur “clean energy” jobs. Within the language of the law, there are bonus credits for businesses that pay “prevailing wages” and that hire registered apprentices. These incentives accompany expanded tax credits to promote energy efficiency in commercial and residential structures, and vehicles (i.e., Electric Vehicle charging infrastructure credits). Now, those companies that do not pay prevailing wages as promised will face penalties and owe workers the wages they were supposed to get – plus any accrued interest.

A White House “fact sheet” released following the passage of the IRA reads: “For the first time ever, the Inflation Reduction Act establishes Make it in America provisions for the use of American-made equipment for clean energy production.”

Back to taxes, additional provisions are in place to cap increases in taxes for families who earn less than $400K annually. In an effort to ensure corporations pay what they owe, a minimum corporate tax of 15% was highlighted in the White House statement. This provision accompanied other tax-related efforts to support easy access to credits and benefits for “regular Americans,” and surcharges to encourage investment rather than corporate stock buybacks that benefit CEOs and funnel tax-free profits to shareholders.

Previously, we alluded to the IRA and provisions with it that target the cost of health care. Notably, the IRA reportedly curbs costs by zeroing in on prescription drugs, with caps for Medicare enrollees on out-of-pocket costs and specific supplies such as insulin. Another “first” is noted in the law: Medicare will be armed with the ability to negotiate prices for “high-cost” drugs.

It should be noted that provisions are due to be phased-in over the next six years. For instance, some health care subsidies and clean energy credits are available pretty much immediately. However, the likes of a proposed $2,000 annual cap on drug costs for Medicare Part D enrollees, and the ramp-up of negotiations with drug companies from 10 to 20 drugs classified as “high-cost” are slated for 2025, 2026, and 2029, respectively.

One can connect the dots between how a reduction of energy and health care costs, and increased supplies and/or competition, can tamp inflation; yet, these are only a few of the big drivers behind the “I” word. Getting through these periods relatively unscathed comes back to Fed Reserve and fed government policies, yes, but there are also important considerations for John Q. Consumer to explore.

Some states have mandated inflation relief checks for qualifying taxpayers, which are aimed at accounting for some of the costs that are not directly addressed in the IRA; for instance, household “basics” like food. Of course, not unlike other forms of legislation, these “stimulus checks” have been both applauded and decried, depending on which side of the political aisle you fall on.

One thing is for sure: There are timeless considerations as taxpayers and nest egg-builders, which should not be at the mercy of the geopolitical whims of the moment. This is our bread and butter at O’Donnell, Ficenec, Wills & Ferdig, supporting our clients in reaching their personal and financial goals, and in breaking through the noise. And investing and saving can be a particularly “noisy” space in volatile and uncertain times.

Next up, we will explore the effect of inflation on the “average” person’s portfolio, and how to protect one’s wealth well now and well into the future. In the meantime, we encourage you to contact us with questions or concerns. Our team is here to help!

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