The Manchin-backed Inflation Reduction Act is likely to live up to its name, Moody's economists say

• The Manchin-backed Inflation Reduction Act will actually cool inflation, Moody's Analytics said Monday.
• The measure will have "a material beneficial economic impact," even if its effect on inflation is "modest."
• The IRA will also boost economic growth slightly by 2031, the team at Moody's added.

The Inflation Reduction Act will do what it says on the tin, according to economists at Moody's Analytics.

After months of discussions, roadblocks, and seemingly insurmountable disagreements, key Senate Democrats have agreed on a version of President Joe Biden's economic agenda. Sen. Joe Manchin of West Virginia struck a deal with Senate Majority Leader Chuck Schumer on Wednesday to back a smaller version of the Build Back Better plan, reviving the measure after Manchin effectively killed it in late 2021.

If passed, the plan "will nudge the economy and inflation in the right direction," economists led by Mark Zandi said in a Monday research note. The $790 billion package will be fully paid for by higher taxes on corporations and wealthy households, enhanced IRS enforcement, and lower Medicare drug costs. That cash will go toward lowering ACA health care premiums, funding clean energy projects, and reducing the government's deficit.

That focus on fiscal restraint will have the most immediate impact on inflation, Moody's said. Taxes on corporations will slow growth, in turn cooling the economic activity that's helped push price growth to 40-year highs.

The extension of pandemic-era ACA credits will also help quickly ease inflation, the team said. Health insurance costs were poised to climb next year for millions of Americans buying insurance on Obamacare exchanges had Congress not prolonged the credits.

Shifting the package's focus was key to winning Manchin's crucial support. The West Virginia senator backed the measure only after other senators and former Treasury Secretary Larry Summers convinced him it wouldn't worsen inflation, and that a slimmer version of the bill could actually counter the country's months-long price surge. 

"I never did walk away. We reorganized the bill," Manchin said on a Sunday CNN appearance. "We got the bill down to where there's nothing inflammatory in this bill."

The IRA is much smaller than the $2 trillion BBB plan it succeeds, but it's a better fit for the present moment, the economists said.

"It will have a material beneficial economic impact," the team said. "While modest legislation, there is plenty to like in the Inflation Reduction Act."

The overall impact on price growth will be limited, however. Moody's expects the IRA to only lower the Consumer Price Index — a popular gauge of overall inflation — by 0.33% by the fourth quarter of 2031, according to the note.

The impact will be "marginal" through the middle of the 2020s but become more "meaningful" later in the decade, the team added.

The proposal will also have a positive effect on overall economic output. Passing the IRA will add an estimated 0.2% to real gross domestic product by the fourth quarter of 2031, the team said. The effect will first show up as a slight drag on GDP through the middle of 2025 as tax hikes slow corporate activity, but the impact will turn positive in the second half of the decade as the plan's benefits filter throughout the economy, they added.

To be sure, the IRA isn't a done deal. Sen. Kyrsten Sinema of Arizona has yet to speak on the measure, and her opposition to tax hikes targeting the wealthy derailed a prior version of BBB.

Manchin's plan could be similarly upended. The two senators disagree on carried interest, a loophole in the US tax code that allows investors to pay a lower tax rate on income made from held assets. Sinema is known to object to closing the loophole. Since the IRA needs unanimous support from all 50 Senate Democrats, that stance threatens to tank the legislation.

It likely won't take long for Sinema's stance to be revealed. Manchin said Sunday he hopes to pass the measure by the end of the week, before the Senate leaves Washington for an August recess.

With Moody's analysis depicting the IRA as a true inflation fighter and a boon to economic growth, the West Virginia senator has one more tool with which to win over much-needed support.