Moody’s: New US bill will reduce inflation and deficit over time

A sweeping bill passed by the US Senate on Sunday aimed at fighting climate change, lowering drug prices and raising some corporate taxes will reduce inflation in the medium to long term and reduce the deficit, the rating agency said. Moody’s to Reuters on Monday.

The legislation, known as the Lower Inflation Act, however, will not reduce inflation “next year or the year after,” said Madhavi Bokil, senior vice president at Moody’s Investors Service.

“We believe this act will have an impact (on reducing inflation) as it increases productivity,” she said, adding that her horizon was two to three years.

The Senate on Sunday approved the $430 billion bill, a major victory for President Joe Biden, sending the measure to the House of Representatives for a vote, likely on Friday. It is expected to pass and be sent to the White House for Biden to sign.

Republicans, arguing the bill would not address inflation, denounced it as a job-killing left-wing spending wish list that could undermine growth when the economy risks slipping into recession.

Bokill said that in the immediate near term inflation will be tackled by the Federal Reserve as it raises interest rates.

Inflation expectations are a key dynamic closely watched by Fed policymakers as they aggressively raise interest rates to contain price pressures at four-decade highs.

While the legislation’s short-term impact on inflation will be modest, the bill still has the potential to lower inflation expectations, Wendy Edelberg, senior fellow for economic studies at the Washington think tank the Brookings Institution, told Reuters on Monday .

Asked how the legislation would affect the budget deficit, Bokill said, “The savings on the Medicare side as well as the tax changes will more than offset the additional costs.”

The legislation aims to lower prescription drug costs by allowing Medicare, the government’s health care plan for the elderly and disabled, to negotiate prices on a limited number of drugs.

Edelberg also said the bill would lead to “more corporate tax revenue than we would otherwise see,” which would offset costs and control the deficit.

Bokill also said the spending bill was complementary to another bill recently passed by Congress that aimed to subsidize the U.S. semiconductor industry and boost efforts to make the United States more competitive against China. “They’re moving in the same direction, so the chip law will also help alleviate some of the supply chain issues,” he said.