GDP result masks inflation problems

Well, the figures are in, and America's GDP rose by 0.6% in the 1st quarter of 2008 (January-March). So much for doom and gloom hey? All praise to Ben Bernanke then?

Unfortunately, the GDP figure is not adjusted for inflation. The 0.6% growth over a 3 month period represents a 0.6% growth in the amount of goods and services produced - but this figure does not take inflation into account.

Over at the St. Louis Fed, "Fred" allows us to measure how much inflation has affected the economy over the same period. This index, called "CPIAUCSL", measures inflation (seasonally adjusted) by giving it a number for every month.

So what was the inflation result over the same three month period? Well, December 2007's CPIAUCSL result was 211.680, while March 2008's result was 213.301. This indicates that inflation during this three month period increased by 0.77%.

So while the GDP numbers being crunched ended up saying the US is 0.6% "bigger", the inflation figures end up saying that this number, when adjusted for inflation, is actually a contraction.

Of course, there's more to this than meets the eye. The 4th Quarter of 2007 had GDP rise by the same amount - 0.6% - but what about the inflation figures?

Well, September 2007's CPIAUCSL result was 208.509, while December 2007's CPIAUCSL was 211.68. This indicates that inflation during this three month period increased by 1.52%.

A 0.6% increase in GDP in 4th quarter 2007 had been more than erased by an increase in prices of 1.52%.

So in terms of inflation adjusted GDP figures, it could be argued that the US has had negative growth for two quarters, thus fitting into one definition of "recession". Unemployment during this period has increased from 4.7% in September 2007 to 5.0% in December 2007 (a steady increase, commensurate with inflation of 1.52% substanitally outstripping GDP growth of 0.6%) to 5.1% in March 2008 (a slight increase, commensurate with the inflation of 0.77% slightly outstripping GDP growth of 0.6%).

Of course, there are a number of assumptions I have made here, namely that GDP figures are never inflation adjusted when they are released. I have also used seasonally adjusted inflation figures rather than the raw figures. The problem here is, of course, the measurement of a raw figure (GDP) against a seasonally adjusted figure (CPIAUCSL). If you measure the raw inflation figure (CPIAUCNS), the result ends up being a 1.67% inflation increase in the 1st quarter of 2008, and a 0.74% increase in the 4th quarter 2007 - both of which still outstrip GDP growth during those periods, and even more so than the seasonally adjusted figures I have used above.

This post is very, very wrong. See here for more details.

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