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1 Inflation and Its Effects 1 (September 1, 2021)

handle is hein.congrec/cboinfleft0001 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Phillip L. Swagel, Director U.S. Congress Washington, DC 20515 September 1, 2021 Honorable Jason Smith Ranking Member Committee on the Budget U.S. House of Representatives Washington, DC 20515 Re: Inflation and Its Effects Dear Congressman: This letter addresses the three questions that you asked about the effects of high inflation. Inflation and Income You asked how household income is affected when inflation exceeds the growth of labor income. Inflation has eroded the purchasing power of families. From the second quarter of 2020 through the second quarter of 2021, compensation per hour of work (as measured by the employment cost index for workers in private industry) increased by 3.1 percent. Over the same period, the price index for personal consumption expenditures (which the Federal Reserve uses to define its 2 percent long-run goal for inflation) increased by 3.9 percent. The purchasing power of compensation for an hour of work has therefore declined by about 0.7 percent over the past year. A year ago, the Congressional Budget Office did not project that the erosion of purchasing power would occur. In CBO's assessment, the growth of real labor compensation (that is, compensation adjusted to remove the effects of inflation) will eventually align with the growth of labor productivity. In CBO's most recent projections, real labor compensation and labor productivity increase by 1.6 percent annually, on average, from 2022 through 2031. Inflation and Taxes You also asked who pays higher taxes when inflation rises. The answer depends on the characteristics of the tax-filing unit. Although many aspects www.cbo.gov

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