CBO Joins Team Transitory

05/25/2022 12:00am

Inflation is persisting at rates far higher than most of us consider acceptable. The future path continues to be the focus of the debate on economic prospects. On one side, many of us continue to believe inflation is a temporary phenomenon caused by the reopening from the pandemic and the war in Ukraine. On the other side are those who see inflation spiraling upward to more dangerous levels, with a severe recession the only factor that can stop it.

In its latest report on the budget and the economy, the Congressional Budget Office (CBO) sided clearly with those arguing the case for inflation being temporary. The report projected that inflation, as measured by the Consumer Price Index, would fall to 2.7 percent next year and 2.3 percent in 2024. That is somewhat higher than in the pre-pandemic period, but certainly not spiraling inflation.

This drop in the inflation rate is not accomplished by a surge in unemployment. It projects that unemployment in the fourth quarter of this year will be 3.7 percent this year. It will be 3.6 percent in the fourth quarter of next year, and 3.8 percent in 2024. If this projection proves to be true, this would be the lowest three-year stretch for unemployment in the post-World War II era.

CBO also projects that the profit share of national income will fall back to its pre-pandemic level. This will allow wage growth to outpace productivity growth for this three-year period.

These projections show an outstanding picture of the economy for this period. CBO can be wrong, but these are serious projections from a non-partisan source. If they prove true, we will have much to celebrate.   

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