The Congressional Budget Office (CBO) projected that US inflation (price index for personal consumption expenditures -PCE) would increase 4% in 2022.

The projection reflects a variety of factors that continue to constrain supply in the face of strong demand.

In the second half of 2022, according to the CBO’s outlook, supply-side conditions improve and energy prices decline.

Likewise, inflation measured by the PCE price index falls to 2.3% in 2023.

From 2024 to 2026, inflation would remain close to the Federal Reserve‘s long-term target of 2 percent.

The projection also considers that inflation remains high in 2022; its pace since mid-2021 has been the fastest in four decades.

Inflation

The CBO expects inflation to remain high in 2022 due to several factors that continue to constrain supply in the face of strong demand in the product and labor markets.

Inflation slows in 2023 and 2024 in the CBO projections, approaching the Fed’s long-term target of 2% by the end of 2024.

In the projections, initially elevated inflation persists in 2022 due to a combination of strong demand and tight supply in the goods, services and labor markets.

Inflation then declines as supply disruptions dissipate, energy prices decline, and less accommodative monetary policy takes hold.

In response to rising prices for personal consumption expenditures in 2022, the Federal Reserve has tightened monetary policy and interest rates are rising rapidly.

At the same time, real GDP is expected to grow 3.1% in 2022 and the unemployment rate averages 3.8%.

After 2022, economic growth would slow and inflationary pressures would subside.

The CBO now projects higher inflation in 2022 and 2023 than last July; prices are rising faster in many sectors of the economy than the CBO anticipated.

The CBO also expects both short-term and long-term interest rates over the next decade to be higher, on average, than its previous forecast, reflecting in part higher inflation.

To contain inflationary pressures, the Federal Reserve raises the target range for the federal funds rate (the rate that financial institutions charge each other for overnight loans of their monetary reserves); that rate would rise to 1.9% by the end of 2022 and to 2.6% by the end of 2023.