Inflation to Remain High in 2022, Congressional Budget Office Warns

Prices for gas at an Exxon gas station on Capitol Hill in Washington are seen March 14, 2022. (Win McNamee/Getty Images)

The Congressional Budget Office (CBO) is expecting inflation to remain elevated in 2022 and then to subsequently decrease over the next couple of years, the agency said on May 25.

The Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve’s preferred measure of inflation, will be 4 percent in 2022, the agency projected in its recently published Budget and Economic Outlook report (pdf).

Although this is a decline from the 5.5 percent inflation of 2021, it still remains elevated and is double the Fed’s goal of 2 percent inflation. The PCE Price Index in 2020 was 1.2 percent.

The core PCE Price Index, which excludes volatile items like energy and food prices, is expected to grow by 3.8 percent in 2022, down from 4.6 percent in 2021, and up from 1.4 percent in 2020.

The CBO is expecting many of the ongoing disruptions to supply of goods and services, as well as the effects of COVID-19-related legislation, to keep inflation high during the first half of 2022. By the middle of this year, these effects are projected to fade.

During 2023–2024, inflation is estimated to decline due to reduced supply chain disruptions, slower growth in the price of goods that will “more than offset” increases in the prices of services, and the action of the Federal Reserve to rein in inflation.

“In the agency’s projections, quarterly inflation—as measured from one quarter to the next—peaks in the first quarter of 2022 and then declines during the rest of the year and throughout 2023. CBO expects the core PCE price index to grow by 2.5 percent in 2023 before nearing the Federal Reserve’s long-run goal of 2 percent in 2024,” the report said.

Prices of energy, food, and motor vehicles soared in 2021. The CBO is expecting these categories to continue keeping inflation high in 2022, but their effects are expected to taper off beginning next year.

The CBO report comes as 12-month consumer inflation is hovering at multi-decade highs. In April, the Consumer Price Index came in at 8.3 percent, remaining close to the 8.5 percent 40-year high recorded in March.

In its recent policy meeting on May 25, the Federal Open Market Committee admitted that high inflation rates were putting a strain on household budgets.

“Various participants remarked on the hardship caused by elevated inflation and heightened inflation uncertainty—including by eroding American families’ real incomes and wealth and by making it more difficult for businesses to make production and investment plans,” the minutes of the meeting read.

The Fed raised interest rates by 50 basis points in May, and officials have stated that multiple such hikes are a possibility in upcoming meetings to control inflation. Fed Chairman Jerome Powell has committed to keep raising interest rates until inflation comes down.