The worst of inflation is over, says the Congressional Budget Office

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The nightmare of soaring prices is beginning to fade, according to new projections from the Congressional Budget Office.

The nonpartisan agency updated its economic forecast on Wednesday, outlining how it expects the United States to develop over the next few years, and the outlook is encouraging. The bureau expects growth to continue through 2022 despite growing fears of a recession. And after several months of the fastest inflation since the 1980s, price growth should have peaked.

The PCE price index, one of the most watched measures of inflation in the United States, is expected to climb 4% through 2022, according to the report. That’s down from the 6.6% annual gain seen in the year to March and last year’s 5.5% increase. It also represents a return to the rates last seen in May 2021, signaling that much of the surge in inflation will reverse by the end of the year.

The core PCE, which weeds out volatile food and energy prices and is the Federal Reserve’s inflation indicator of choice, will show a similar slowdown, the CBO said. This measure of core inflation dynamics is expected to rise 3.8% this year after rising 4.6% in 2021. The cooling will continue, with core inflation expected to reach 2.5% in 2023 and 2.2% the following year.

Projections for the consumer price index, another popular measure of inflation, are equally encouraging. If the CBO estimates ring true, then inflation will have peaked in the spring of 2022 and will return to more sustainable levels by the end of next year.

As the CBO sees inflation cooling, it also expects the economic rebound to continue. Gross domestic product will expand 3.1% in 2022, the agency said, reflecting a rebound from the small contraction seen in the first quarter. Growth is then expected to slow to 2.2% in 2023 amid rising interest rates and diminishing support from government stimulus.

The unemployment rate, meanwhile, is expected to reach 3.7% by the end of the year, up slightly from current levels. The labor market is already on track to complete its rebound this summer, and the CBO’s estimate suggests progress will continue for the rest of the year.

To be sure, a host of uncertainties could render the bureau’s predictions groundless. Much of the inflation problem has to do with the global supply chain tangle, and the latest coronavirus outbreak in China could prevent global trade from rebounding. Russia’s invasion of Ukraine could further exacerbate shortages of crude oil, fertilizer and wheat. And if Americans’ inflation expectations climb to higher levels, it could be even harder for the Fed to rein in price growth.

Still, updated projections suggest the United States is approaching a pivot point in the economic recovery. After a year of stifling inflation and renewed fears of an economic slowdown, the CBO sees better days ahead.

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