CBO Projects Inflation, Economic Growth to Cool This Year and Next

The CBO forecasts are also likely to be closely scrutinized by Washington lawmakers and policy makers, given the prominent role inflation and the path of the economy are playing in the political landscape ahead of midterm elections that will determine which party controls Congress.

“Elevated inflation persists in 2022 because of the combination of strong demand and restrained supply,” CBO Director

Phillip Swagel

said in a statement. “After 2022, economic growth slows, and inflationary pressures ease.”

The CBO isn’t projecting an annual contraction in economic output. Rather, it forecasts slowing growth, with inflation-adjusted gross domestic product estimated to expand 3.1% in the fourth quarter from the previous year, compared with 5.5% in 2021. The economy expanded 2.6% in 2019, the last full year before the pandemic took hold.

The agency projects the economy to grow at a slower 2.2% in 2023 and 1.5.% in 2024, as measured from fourth quarter to fourth quarter. CBO estimates output growth will slow after 2022 due to factors including tighter monetary policy and reduced fiscal support.

The CBO sees inflation, as measured by the consumer-price index, at 4.7% in the fourth quarter from the previous year. That would reflect an easing from the more than 8% annual inflation recorded in recent months, but would still be well higher than prepandemic levels, of near 2% annual inflation. CBO said it expects supply disruptions dissipate and energy prices to decrease in the second half of 2022.

The CBO estimates inflation will cool further in 2023 and 2024, with consumer prices rising 2.7% and 2.3%, respectively.

The CBO’s forecasts reflect economic developments as of early March 2022.

The U.S. unemployment rate is projected to rise only slightly to 3.7% in the fourth quarter of this year, the CBO said, from 3.6% last month. The jobless rate has fallen sharply since the early months of the Covid-19 pandemic and is now hovering near a 50-year low, but Fed Chairman

Jerome Powell

has said that unemployment might rise slightly as the central bank works to lower inflation. The CBO forecast an unemployment rate of 3.6% at the end of 2023 and 3.8% at the end of 2024.

CBO last issued its budget and economic forecasts in July 2021, before prices surged and war broke out in Ukraine. Last summer, the agency projected the same growth for the economy in 2022, at 3.1%, but its estimate for inflation for both this year and 2023 was lower at 2.3%.

Meanwhile, the CBO sees shrinking deficits this year and in 2023, in part because of reduced federal outlays on pandemic aid, but budget shortfalls are projected to rise in most years after that through 2032. CBO estimates a $1.03 trillion deficit in the current fiscal year, which ends in September, compared with roughly $2.8 trillion the previous year.

CBO expects the annual deficit as a share of the economy to grow from 4.2% in 2022 to 6.1% in 2032.

Rising federal revenue from tax collection and other sources are one factor contributing to narrower near-term deficits. Revenues are projected to reach their highest level as a share of the economy in more than two decades this year, and then to decline over the following few years but remain above their long-term average through 2032, the CBO said.

President Biden has increasingly pointed to the falling federal deficit as he makes the case for his economic agenda and seeks to persuade Americans that his policies have helped the U.S. fiscal picture and overall economy. Republicans and some budget analysts have countered that the falling deficit is primarily the result of reduced federal spending as the pandemic recedes, rather than any administration policy action. GOP lawmakers—who see inflation as an issue that can win their party voters in the midterm elections—have also blamed the Biden administration’s policies for consumer-price increases.

CBO expects higher interest rates to push federal spending on net interest costs to $399 billion this year, compared with $352 billion in 2021. Interest costs are expected to increase in each fiscal year through 2032, according to the agency’s estimates.

CBO also estimates total federal debt as a share of the economy will be 97.9% in 2022, easing from 99.6% the prior year, but still well above prepandemic levels. A decade from now the agency projects federal debt to be equal to 109.6% of the economy’s size, which would be the highest level ever, according to CBO.

Write to Amara Omeokwe at [email protected]

The CBO forecasts are also likely to be closely scrutinized by Washington lawmakers and policy makers, given the prominent role inflation and the path of the economy are playing in the political landscape ahead of midterm elections that will determine which party controls Congress.

“Elevated inflation persists in 2022 because of the combination of strong demand and restrained supply,” CBO Director

Phillip Swagel

said in a statement. “After 2022, economic growth slows, and inflationary pressures ease.”

The CBO isn’t projecting an annual contraction in economic output. Rather, it forecasts slowing growth, with inflation-adjusted gross domestic product estimated to expand 3.1% in the fourth quarter from the previous year, compared with 5.5% in 2021. The economy expanded 2.6% in 2019, the last full year before the pandemic took hold.

The agency projects the economy to grow at a slower 2.2% in 2023 and 1.5.% in 2024, as measured from fourth quarter to fourth quarter. CBO estimates output growth will slow after 2022 due to factors including tighter monetary policy and reduced fiscal support.

The CBO sees inflation, as measured by the consumer-price index, at 4.7% in the fourth quarter from the previous year. That would reflect an easing from the more than 8% annual inflation recorded in recent months, but would still be well higher than prepandemic levels, of near 2% annual inflation. CBO said it expects supply disruptions dissipate and energy prices to decrease in the second half of 2022.

The CBO estimates inflation will cool further in 2023 and 2024, with consumer prices rising 2.7% and 2.3%, respectively.

The CBO’s forecasts reflect economic developments as of early March 2022.

The U.S. unemployment rate is projected to rise only slightly to 3.7% in the fourth quarter of this year, the CBO said, from 3.6% last month. The jobless rate has fallen sharply since the early months of the Covid-19 pandemic and is now hovering near a 50-year low, but Fed Chairman

Jerome Powell

has said that unemployment might rise slightly as the central bank works to lower inflation. The CBO forecast an unemployment rate of 3.6% at the end of 2023 and 3.8% at the end of 2024.

CBO last issued its budget and economic forecasts in July 2021, before prices surged and war broke out in Ukraine. Last summer, the agency projected the same growth for the economy in 2022, at 3.1%, but its estimate for inflation for both this year and 2023 was lower at 2.3%.

Meanwhile, the CBO sees shrinking deficits this year and in 2023, in part because of reduced federal outlays on pandemic aid, but budget shortfalls are projected to rise in most years after that through 2032. CBO estimates a $1.03 trillion deficit in the current fiscal year, which ends in September, compared with roughly $2.8 trillion the previous year.

CBO expects the annual deficit as a share of the economy to grow from 4.2% in 2022 to 6.1% in 2032.

Rising federal revenue from tax collection and other sources are one factor contributing to narrower near-term deficits. Revenues are projected to reach their highest level as a share of the economy in more than two decades this year, and then to decline over the following few years but remain above their long-term average through 2032, the CBO said.

President Biden has increasingly pointed to the falling federal deficit as he makes the case for his economic agenda and seeks to persuade Americans that his policies have helped the U.S. fiscal picture and overall economy. Republicans and some budget analysts have countered that the falling deficit is primarily the result of reduced federal spending as the pandemic recedes, rather than any administration policy action. GOP lawmakers—who see inflation as an issue that can win their party voters in the midterm elections—have also blamed the Biden administration’s policies for consumer-price increases.

CBO expects higher interest rates to push federal spending on net interest costs to $399 billion this year, compared with $352 billion in 2021. Interest costs are expected to increase in each fiscal year through 2032, according to the agency’s estimates.

CBO also estimates total federal debt as a share of the economy will be 97.9% in 2022, easing from 99.6% the prior year, but still well above prepandemic levels. A decade from now the agency projects federal debt to be equal to 109.6% of the economy’s size, which would be the highest level ever, according to CBO.

Write to Amara Omeokwe at [email protected]