Inflation is unlikely to cool to the Federal Reserve’s target of 2 percent until 2026, the Congressional Budget Office predicted in its annual fiscal outlook on Wednesday.
Additionally, nonpartisan analysts at the agency said the federal deficit under President Joe Biden will hit $1.4 trillion this year, with the gap between the amount of money the federal government spends and how much revenue it brings in widening by $3 trillion more over the next decade than the independent budget office originally predicted last May. That’s thanks in part to passage of legislation like Democrats’ climate, tax and health bill and bipartisan legislation to boost semiconductor manufacturing, among other measures.
The projections come as Republican leaders and the White House wrestle over the $31.4 trillion federal debt, with conservatives pushing for spending cuts to chip away at the nation’s rising credit card tab.
Deficits as a share of the economy are expected to grow from 5.3 percent this year to 6.9 percent of GDP in a decade, “a level exceeded only five times since 1946,” the independent budget office noted on Wednesday.
Debt held by the public is also expected to reach its highest level ever recorded in the next 10 years, hitting 118 percent of GDP in 2033. The debt could skyrocket to 195 percent of GDP by 2053, thanks to growing interest costs and increased mandatory spending on programs like Medicare and Social Security, CBO analysts said.
Inflation will “gradually” slow this year as demand starts to sync more closely with supply. But the budget office projects that inflation will be higher this year and next year than originally anticipated, with the Federal Reserve likely hitting its target inflation rate of 2 percent in 2027.
Just last spring, the budget office said inflation would likely cool to the Central Bank’s target sometime after 2024, after initially predicting prices would reach that point by the end of last year.
Due to the Federal Reserve’s rapid interest rate hikes, economic activity is also expected to stagnate this year, with falling inflation and rising unemployment. The unemployment rate is projected to climb from 3.6 percent at the end of 2022 to more than 5 percent by the end of this year.
Real GDP growth is expected to rebound as the Central Bank eases up on interest rate hikes, averaging 2.4 percent annually through 2027.
The budget office cautioned that its economic projects are subject to change based on a variety of factors, including fluctuations in the labor market and the ongoing war in Ukraine.