The Congressional Budget Office expects inflation will decrease to 2.1% next year, the nonpartisan group said in a report released Friday.
The Federal Reserve targets a 2% inflation rate to maximize employment and stabilize consumer prices.
The CBO report expects inflation will continue to slow through the end of 2025, declining from an expected 2.9% at the end of 2023 due to softer labor markets and slower rent increases. It anticipates the unemployment rate rising from 3.9% at the end of 2023 to 4.4% in the last quarter of 2024 and remaining elevated for the following year.
In 2025, the CBO expects inflation to rise to 2.2% with stronger economic activity spurred by interest rate cuts. The report predicts interest rates will remain at their current level of 5.25-5.5% through the first quarter of 2024 and will be reduced in response to declining inflation and increasing unemployment. Interest rates on 10-year Treasury notes are likely to increase to 4.8% in the second half of 2024 and to begin falling in the middle of 2025.
The report also expects gross domestic product to slow next year as consumers spend less, business investments tighten and exports decrease. That trend will reverse in 2025, as lower interest rates improve financial conditions, the CBO said.