Economic Report of the President

The projected path of inflation as measured by the GDP price index issimilar, but a bit lower. It is projected to fall to 1.9 percent during the fourquarters of 2005, down slightly from the 2.2 percent annual rate of increasein the GDP price index excluding food and energy during 2004. During thenext several years, the GDP price index is projected to increase at a 2.0 or 2.1percent annual rate—a stable pace of inflation consistent with the projectedunemployment rate of 5.1 percent.These inflation projections—although revised up from a year ago—areclose to those of the consensus of professional economic forecasters.The wedge between the CPI and the GDP measures of inflation has implicationsfor Federal budget projections. A larger wedge would reduce theFederal budget surplus because cost-of-living adjustments for Social Securityand other indexed programs rise with the CPI, whereas Federal revenue tendsto increase with the GDP price index. For a given level of nominal income,increases in the CPI also cut Federal revenue because they raise income taxbrackets and affect other inflation-indexed features of the tax code. Of thetwo indexes, the CPI tends to increase faster in part because it measures theprice of a fixed basket of goods and services. In contrast, the GDP price indexincreases less rapidly because it reflects the choice of households and businessesto shift their purchases away from items with increasing relative pricesChapter 1 | 41