February 15, 2022
WASHINGTON DC— Today, U.S. Senator Rob Portman (R-OH) and fellow Republicans on the Senate Finance Committee are asking the Congressional Budget Office (CBO) for detailed information on the adverse effects of inflation on the federal budget, given the high and accelerating inflation in the United States. currently lives. As inflation continues to pound Americans’ wallets, it is also eating away at fiscal space by increasing deficits and debt, and acting as a stealth tax on households and businesses.
“Rising inflation leads to more federal spending and more federal revenue. The additional revenue comes in part, and unfortunately for taxpayers, from nominal inflationary gains that do not appear as purchasing power-adjusted gains to federal taxpayers. The stealth nature of taxes on inflation and the revenue derived from them should not be viewed as an economic advantage,” write the senators.
They continued, “The adverse effects of inflation on the federal budget, including the likely increase in payments to pay down outstanding debt, absorb fiscal space, and crowd out a host of national priorities, ranging from support programs to weak income from national defense to disaster relief”.
The senators also cite a budget handbook on the CBO’s website which suggests that a persistent increase in inflation of 1% above the CBO’s baseline projection made early last year could increase deficits by nearly $2.3 trillion over a 10-year period. They ask the CBO for a description of the fiscal effects of high inflation; persistent inflation; and, higher interest rates that may result from high inflation and possible Federal Reserve responses to inflation.
Read the full letter, signed by all Republican members of the Senate Finance Committee, here or below.
Dear Swagel Director,
Inflation has risen and accelerated significantly throughout 2021, and has been detrimental to US households and businesses.
Year-on-year growth in consumer prices, as measured by the Consumer Price Index (CPI-U), reached a staggering 7.5% in January, from 1, 4% in January last year and an average of 1.9% between the beginning of 2017 and the beginning of 2021. Consumer price inflation, measured either by the CPI or the expenditure price index personal consumption, has accelerated to heights not seen in 40 years.
Signaling that households and businesses will face rising price inflation, producer price inflation has also accelerated to record highs. Year-on-year growth in producer prices, as measured by the producer price index, reached a record high of 9.8% at the end of last year, up from 1 .6% in January last year and an average of 1.8% between the start of 2017 and the start of 2021.
Undoubtedly, in 2021, we had moved from a long period of low and stable inflation to persistent and accelerating inflation that hurts workers, households and the economy. Inflation also acts as a stealth tax, eroding the purchasing power of Americans’ paychecks.
While many had not anticipated runaway, persistent, and accelerating inflation during 2021, others have, especially in light of the American Rescue Plan Act which the CBO says will increase estimated spending. by $1.8 trillion over the 2021-2030 period and increase the estimated deficit by $1.9 trillion, measured against a baseline budget that assumed much lower inflation than last year.
Higher inflation leads to more federal spending and more federal revenue. The extra revenue comes in part, and unfortunately for taxpayers, from nominal inflationary gains that do not translate into real purchasing power-adjusted gains for federal taxpayers. The stealth nature of taxes on inflation and the revenue derived from them should not be viewed as an economic advantage.
Efforts by the Federal Reserve to slow the rate of inflation by raising interest rates can have painful economic consequences, driving up the cost of public and private sector borrowing. As history has shown with the Federal Reserve under President Volker, once inflation gets out of control, getting inflation under control can be temporarily devastating to the economy.
A budget handbook on the CBO’s website suggests that a persistent increase in inflation of 1% above the CBO’s baseline projection made early last year could increase deficits by as much as 2.3 trillions of dollars over a 10-year period. And, according to the playbook, a 1% increase in interest rates above the CBO’s baseline projection, starting in 2022, could increase deficits by more than $2.1 trillion over a 10-year period. year. While these results are only approximations of what the CBO would project using its wide range of economic and fiscal models, they indicate significant adverse fiscal effects amounting to trillions of taxpayer dollars from sustained inflation and higher interest rates in the future.
The adverse effects of inflation on the federal budget, including the likely increase in debt service payments, the absorption of fiscal space, and the crowding out of a multitude of national priorities, ranging from from low-income support to national defense to disaster relief.
Given the potential for significant negative fiscal effects of inflation, we ask the CBO to provide an analysis of these effects. Please provide a description of the budgetary effects of: high inflation; persistent inflation; and, higher interest rates that may result from high inflation and possible Federal Reserve responses to inflation.
We look forward to your responses and appreciate the hard work done by CBO analysts.