In the fourth quarter, the ability to pass costs along was more widely shared across title and responsibility. This could be worrisome to the Federal Reserve as it suggests that cost-push inflation could be becoming more entrenched.
The following represents the second installment of KPMG Economics “Insights on Inflation,” a multiyear survey of KPMG clients and other business leaders to understand their responses to the inflationary environment we are now enduring. Our survey findings suggest that inflationary pressures remain extremely elevated, despite some easing of input costs.
The second wave of the quarterly survey was conducted November 1 to November 18, 2022. It is focused on businesses and provides a more all-encompassing measure of the temperature of the economy than surveys of consumers.
Business expectations of inflation are driven by a combination of demand, labor costs, and competitive pressures, while consumer expectations are unusually sensitive to changes in grocery prices, notably the price of milk, and changes of prices at the gas pump, which are highly visible but do not encompass the full spectrum of inflation pressures.
The results of this quarter’s survey revealed several major shifts: Inflation expectations remain higher among business leaders than consumers; the gap between the expectations of businesses and consumers is converging, which could be a signal of a recession; the retail sector has been hammered with a softening in demand and discounting, and the health care sector is the most at risk of margin compression in the year ahead.
Consumer energy costs
What it is: Direct incentives to consumers for energy-efficient purchases on vehicles, appliances, and home energy systems, with specific allocations for affordable housing energy resources and dedicated incentives for people with lower incomes.
What’s included: $9 billion in home energy programs for disadvantaged communities, $1 billion for energy efficiency in affordable housing, and tax credits for purchasing electric vehicles and green home energy sources (such as solar panels and heat pumps). The purchase credits include caps on a buyer’s income and product costs to ensure broad-based access.
Energy security
What it is: In a word—infrastructure. “Security” means rapidly reducing reliance on other countries to power America via significant new incentives for clean energy production, manufacturing, and supply chain reliability—and future-proofing against energy price shocks.
What’s included: More than $60 billion to onshore clean energy manufacturing overall, including at least $20 billion for green vehicle infrastructure and more than $10 billion in clean technology facilities. Additional grants and credits—for upgrading facilities or producing new green products—make this a category that many business leaders will need to closely consider.
Decarbonization
What it is: This is perhaps the U.S.’s biggest and most defined commitment to “the details” of sustainable energy and net-zero emissions, simply by being a tangible, approved law (as opposed to an executive order). The legislation’s wide-ranging mix of grants and tax credits offers extensive emissions-reduction incentives across myriad business sectors.
What’s included: At least $70 billion in grants, loans, and incentives, with at least $30 billion for states and electric utilities to facilitate cleaner and more efficient local energy generation. Another $27 billion is allocated for grants or indirect investments to help reduce emissions in disadvantaged communities, and about $6 billion is set aside for assistance to large industrial emitters, such as chemical, steel, and cement plants.
Disadvantaged communities and environmental justice
What it is: New provisions to support environmental and climate justice priorities—for example, reducing local air pollution and ensuring equitable green energy access across all neighborhoods—with specific incentives focused solely on disadvantaged communities.
What’s included: $3 billion in grants to address air pollution, $3 billion to improve transportation and community planning, and multiple tax credits for clean vehicles that include school and public transit buses and even eco-friendly garbage trucks.
Rural climate resiliency
What it is: Agricultural producers and forest landowners are significant, but often overlooked, players in climate change. This area of the new law addresses that by providing grants and incentives for climate-smart agriculture practices, forest restoration, and land conservation.
What’s included: $20 billion in grants to support climate-friendly agriculture practices, $5 billion for forestry conservation and urban planning, and about $3 billion for marine habitat conservation.
Final considerations
Perhaps the most important dimension of the Inflation Reduction Act is that it is now actual, approved law—it’s on the books and open for business. And it’s much more sustainable than energy policy initiatives of recent decades, which have largely been driven by executive orders with shelf lives and staying power that were just too hard for many businesses to plan around.
The new law changes that, and especially in its allocations to state, local, and private levels that would make the unprecedented $370 billion federal commitment just a start. The significant new federal incentives for local-private buy-in can activate additional investment and innovation—and create significant new opportunities for businesses of all shapes and sizes.
