High inflation is expected to persist for the rest of the year, saddling Americans with higher costs as price hikes continue, the Congressional Budget Office said on Wednesday.
From the end of 2020 to the end of 2021, the consumer price index — one measure of inflation — grew by roughly 6.7 percent, the highest level in roughly four decades. The pace of that increase will come down, according to the CBO, but only to 4.7 percent — still far higher than policymakers want. Other measures of inflation cited by the budget office project that price hikes will remain roughly twice the Federal Reserve’s intended target of 2 percent. Price increases won’t fall back to targeted levels until 2024, the CBO said.
“There remains a significant gap between consumers’ demand and businesses’ ability to supply it,” said Adam Ozimek, chief economist at the Economic Innovation Group. “People’s desire to consume more goods than businesses can produce is leading to a rise in prices, and consumers are going to feel that in their pocketbooks.”
The projections suggest the Biden administration could remain hemmed in by the politics of high inflation, which has hurt the president’s approval rating, while also potentially defining this fall’s midterm elections. But the CBO report offers some hope for the White House as well, indicating high growth and low unemployment this year.
The eventual easing of inflationary pressure is part of the budget office’s broader predictions of a gradual restoration of more typical economic conditions after disruptions caused by the coronavirus pandemic, trillions of dollars in stimulus, and energy and food shocks after Russia’s invasion of Ukraine. The CBO projects the U.S. economy will grow at 3.1 percent in 2022 — faster than usual, but slower than the rapid 5.5 percent clip of 2021 — as some of the factors juicing demand begin to ebb. Unemployment is projected to remain low, at 3.8 percent this year and 3.5 percent next year.
Similarly, the federal budget deficit that exploded in 2020 and 2021 amid a huge surge in federal pandemic spending is set to moderate over the next several years. The CBO projects the federal deficit will shrink to $1 trillion in 2021 and average $1.6 trillion annually from 2023 to 2032. The federal deficit hit a record of roughly $3 trillion in 2020.
In a news briefing, CBO officials said the economic projections were solidified by March 2 and incorporated some of the initial impact of the disruption caused by Russia’s war in Ukraine. But officials acknowledged that the report does not reflect the likely full impact of the war on prices, as the invasion in particular appeared to put dramatic upward pressure on food and gas costs, and said inflation is likely higher than their report states. The CBO officials spoke on the condition of anonymity under the ground rules of the call.
The administration has tried to highlight the falling deficit, but voters have remained alarmed by rising prices. The persistent price hikes pose a major challenge both for President Biden and the Federal Reserve, which is weighing how to push interest rate hikes to crush higher prices without throwing the economy into recession.
“Other than maybe fuel and energy prices, I think we’ll see a deceleration of inflation,” said Larry Mishel, an economist at the Economic Policy Institute, a left-leaning think tank, in an interview before the report’s release. “How much, how quickly and where it will be is hard to judge.”
Federal revenue is projected to reach its highest level as a percentage of gross domestic product in more than two decades because of the strong economic recovery from the pandemic, according to the CBO. In the news briefing, CBO officials said strong incomes across the economy — though offset by high prices — mean that tax revenue overall is being pushed up, though they said many factors are likely in play. Investors also appeared to pay more on their capital gains, amid a remarkable run-up in the stock market.
Although the deficit is expected to fall in the short term, the CBO estimates that the deficit over 10 years has increased from its last economic projections by roughly $1.1 trillion. That is in part because the central bank’s move to hike interest rates will push up the cost of borrowing, even though revenues will also be higher.