I often feel like not much happens in the summer from an economic and policy perspective. People are taking vacations and enjoying the summer before fall arrives and the school year starts up again. This summer has been anything but quiet and I wanted to provide you with some updates and my perspective.
Inflation slowed in July1
Annual inflation slowed to 8.5% in July as compared to last July, lower than expectations of 8.7% and lower than the 9.1% in June (compared to last June). While that is still a very high number, when you look at changes from this June to this July, prices as a whole did not move. We saw a drop of 4.6% from the previous month in energy, with smaller decreases in used vehicles and airline fares. As an offset, food prices, shelter and new vehicles showed increases. One month does not make a trend, but these numbers could indicate that inflation has peaked. We need a few more months of data to see if we have a lasting trend.
Will the stock market get better in the second half?
As you are all aware, the stock market has been volatile this year with performance well below what we have seen in the previous years. I am hopeful that the declines seen through June have stopped and the July gain in the S&P 500 of 9.11% will continue. So far August has been trending favorably…but nobody knows what will happen in the short term. In the past, when stock markets were down 15% or more in the first half of the year, they rose 24% on average in the second half. This is not a guarantee by any means, but an indicator that better times may be ahead.
Long term, the stock market has rewarded the patient investor who rides out these inevitable down markets and does not lock in losses.
Inflation Reduction Act Details
While the actual effectiveness of this legislation in reducing inflation is a subject of debate among economists, that is the title the new law was given. Here are the main changes that may impact you:
A 15% minimum corporate tax rate for corporations with at least $1B in income was established. There should be no direct tax change to individuals and small businesses, but some worry that large corporations may pass this cost increase on to consumers, creating an indirect “tax”.
For individuals getting health insurance on the private exchanges, the enhanced subsidies for medical insurance premium that were scheduled to expire at the end of the year have been extended through 2025.
For Medicare recipients, there will be a $2,000 cap in annual out of pocket expenses for prescription drugs beginning in 2025.
There are extensions and enhancements to tax credits for certain home improvements (i.e. windows, doors, water heaters, etc). Some taxpayers may also qualify for rebates for purchasing energy efficient appliances.
Clean energy Production3
Credits for installation of residential solar systems, battery storage, plus other technologies, has been extended to 2034 with the credit percentage increased to 30% until 2032.
Electronic Vehicles (EVs)4
The tax credit for EVs placed into service after December 31, 2022 was extended for 10 years until 2032. If you purchase the EV in 2024 or after, you have the option of transferring the credit to the dealer as a discount when you purchase the vehicle. It is important to note that you may not get a credit if your AGI is too high, the cost of the vehicle exceeds certain limits, or the final assembly of the car was not in North America.
Student Loan Payments
The pause in student loan repayments is scheduled to expire on September 1st unless the U.S. Government decides to extend the payment pause. As there has been no word either way, it seems likely this pause will continue. It would be very difficult for loan services to get things running again under such short notice. We are also approaching the midterms in November and economic decisions in Washington can be made for political vs economic reasons.