CBO Inflation Projections “Far Too Optimistic”

Larry Summers reacted last week to the Congressional Budget Office (CBO) projection of inflation over the next decade as “far too optimistic” and said the CBO is the “last holdout on team transitory.”

Summers is a Harvard professor and as an economist he served as Treasury Secretary in the Clinton administration and Director of the National Economic Council during the Obama administration. In an interview last Friday on Bloomberg’s “Wall Street Week,” he said that the CBO’s inflation projections are the “least plausible” he has seen in 40 years of his career.

The CBO projected last week that price inflation will come in at 4.7% for all of 2022, will be 2.7% in 2023, and 2.3% in 2024. The agency also predicted that unemployment will remain consistently below 4%.

Summers said that in watching CBO projections for four decades, he has always considered the agency as a “bastion of credibility.” He did note that the projections are based on data collected months ago, and there have been many “adverse happenings” recently.

He criticized the latest projections as being based on the belief that it is possible to overstimulate the economy and “somehow still have inflation come way down.” While he said that it is certainly possible that the “supply side is just going to wonderfully materialize” it is not understandable how the CBO can regard that as the “most likely outcome.”

The supply side of the American economy continues to struggle in the aftermath of the COVID-19 pandemic and continuing supply chain issues. The U.S. Gross Domestic Product (GDP) fell by 1.4% over the first quarter of the year, indicating continuing contraction of the overall economy.

Summers also said that 2% inflation really cannot be considered as a “best guess” when considering the plausibility of an estimate being very wrong on both the upside and the downside.

Although the CBO said it believes this year’s total inflation number will come in at 4.7%, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index shot up in April by 8.3% over the last 12 months. That marks inflation as running near a 40-year high.

Gas prices hit another all-time record high over the holiday weekend, coming in on Monday at a national average of $4.62 per gallon.