Critics warn US Inflation Reduction Act could keep prices high: FT

LONDON -- Economists and investors warn that the US Inflation Reduction Act (IRA) could trigger another bout of inflation, the Financial Times (FT) has reported.

The IRA includes 369 billion US dollars in subsidies to spur domestic clean energy manufacturing and deployment. The Chips and Science Act, passed around the same time, offers more than 50 billion US dollars in incentives to reshore semiconductor production. The scale of the federal handouts has already sparked an investment boom, the British newspaper said on Monday.

But it is now stoking fears that a scramble for workers will trigger another bout of inflation, complicating the Federal Reserve's efforts to cool the economy, according to the FT.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, estimates the tight labour market and sourcing requirements will add 10 percent to project costs.

"We're pouring a lot of money into getting these firms to come to the US, expanding in the US, and there aren't workers for that, and it's not like you're going to pull workers from McDonald's," said Hufbauer.

The United States will need an additional 546,000 construction workers on top of the normal hiring pace to meet increased demand for projects pushed along by the IRA and other bills, according to Associated Builders and Contractors.

Consultants at McKinsey warn the US semiconductor push will exacerbate the existing shortfall of engineers and technicians, with companies across industries expected to need an additional 300,000 engineers and 90,000 technicians by 2030.

Biden administration's effort to break dependence on China by subsidising domestic manufacturing will also keep prices high, warned Larry Fink, chief executive officer of BlackRock.

"You don't hear the word globalization anymore," Fink told an energy conference at Columbia University this month. "We're building new chip factories in the United States - at what cost?"

He said the Biden administration's efforts to reshore manufacturing would mean US inflation was unlikely to fall below 4 percent "anytime soon."

"You're distorting free markets when you create these incentives and when you create rules that require you to buy from domestic firms," said Ethan Harris, head of global economics at Bank of America. "If it was the most cost efficient way to do something, you wouldn't need a subsidy for it."