High inflation will persist into next year, CBO projects
From the end of 2020 to the end of 2021, the consumer price index – a measure of inflation – rose by around 6.7%, the highest level in around four decades. The pace of that increase will decrease, according to the CBO, but only to 4.7%, which is still well above what policymakers want. Other measures of inflation cited by the budget office project that price increases will remain roughly double the Federal Reserve’s 2% target. Price increases will not return to targeted levels until 2024, the CBO said.
“There remains a significant gap between consumer demand and the ability of businesses to meet it,” said Adam Ozimek, chief economist at the Economic Innovation Group. “People’s desire to consume more goods than businesses can produce drives prices up, and consumers are going to feel it in their pocketbooks.”
Projections suggest the Biden administration could remain locked in high inflation policy, which has hurt the president’s approval rating, while potentially defining this fall’s midterm elections. But the CBO report also offers some hope for the White House, pointing to strong growth and low unemployment this year.
The eventual easing of inflationary pressure is part of the Budget Office’s broader forecast of a gradual recovery to more typical economic conditions after the disruption caused by the coronavirus pandemic, billions of dollars in stimulus, and energy and food shocks. after Russia invaded Ukraine. The CBO projects the U.S. economy to grow 3.1% in 2022 — faster than usual, but slower than the rapid 5.5% clip of 2021 — as some of the factors driving demand start to weaken. ebb. Unemployment is expected to remain low at 3.8% this year and 3.5% next year.
Likewise, the federal budget deficit that exploded in 2020 and 2021 amid a huge increase in federal pandemic spending is expected to moderate over the next few years. The CBO projects the federal deficit will shrink to $1 trillion in 2021 and average $1.6 trillion per year from 2023 to 2032. The federal deficit hit a record low of about $3 trillion in 2020.
At a news conference, CBO officials said the economic projections were consolidated on March 2 and incorporated some of the initial impact from the disruption caused by Russia’s war in Ukraine. But officials acknowledged that the report did not reflect the likely full impact of the war on prices, as the invasion in particular appeared to be putting dramatic upward pressure on food and gas prices, and said that inflation was probably higher than their report indicates. CBO officials spoke on condition of anonymity in accordance with ground rules for the call.
The administration tried to highlight the declining deficit, but voters remained alarmed by rising prices. Persistent price increases pose a major challenge for both President Biden and the Federal Reserve, which is mulling over how to push interest rate hikes to crush rising prices without plunging the economy into recession.
“Outside of maybe fuel and energy prices, I think we’re going to see a deceleration in inflation,” said Larry Mishel, an economist at the Economic Policy Institute, a left-leaning think tank, in an interview ahead of the report’s release. “How much, how fast and where it will be is hard to judge.”
Federal revenues are expected to hit their highest level as a percentage of gross domestic product in more than two decades due to the strong economic recovery from the pandemic, according to the CBO. At the press conference, CBO officials said high incomes across the economy — though offset by high prices — mean overall tax revenue is rising, though they said many factors are likely in play. Investors also appeared to be paying more on their capital gains, amid a remarkable stock market acceleration.
Although the deficit is expected to decrease in the near term, the CBO estimates that the 10-year deficit has increased by about $1.1 trillion from its latest economic projections. This is partly because the central bank’s decision to raise interest rates will drive up the cost of borrowing, even though incomes will also be higher.