Now, I know I am often critical of the Heritage Foundation and I have heard suggestions that maybe I ought stop paying them any mind. But when I came across this review of the Congressional Budget Office's update to the Budget and Economic Outlook, I found I could not possibly let them slide.
Complaining about the "remarkably positive economic forecast," J.D. Foster wrote:
"CBO also has another very curious forecast, this for inflation as measured by the Consumer Price Index. The CBO is projecting a very modest 1.3 percent inflation for 2011. Yet on an annualized basis, inflation has run at an average of 4.3 percent over the last eight months. Except for an easing in May and June, on an annualized basis, inflation has exceeded 4.9 percent every month since December 2010.
"Again, the CBO forecast is also substantially out of line with the Blue Chip consensus forecast, which at 3.2 percent is about two-and-a-half times higher. Inflation may taper off, but for the CBO forecast to hold, prices would have to decline through the balance at an annualized rate of almost 2 percent. This would be a stunning—indeed, frightening—prospect in light of current economic weakness."
I had not yet read the CBO report, so I found this charge quite stunning. Fortunately for CBO, and most unfortunately for Foster, the charge is unfounded. The Congressional Budget Office had in January projected 1.3 percent growth in the CPI. At the time, the Blue Chip Consensus (p.51) was only 1.8 percent, so CBO was optimistic at the time, but not grossly so. Then energy prices rebounded and the Blue Chip Consensus revised its inflation forecast upward by 1.4 percentage points to 3.2 percent. Of course, CBO also revised its forecast (p.58) from 1.3 percent to 2.8 percent—a 1.5 percentage point hike.
Thus, only 0.4 percentage points separate CBO from the Blue Chip Consensus. In erring, Foster grossly exaggerated the difference.