According to the Commerce Department, the US economy expanded by 0.6 percent in the first quarter of this year:
The U.S. economy expanded at a 0.6 percent annual pace in the first quarter, reflecting an increase in inventories as consumers retrenched and companies cut investment.
The gain in gross domestic product, the sum of all goods and services produced, was more than forecast and matched the rate of the previous three months, the Commerce Department reported today in Washington. …
To get the 0.6 percent growth number, nominal GDP had to be adjusted for inflation (from the same article):
The report’s price index increased at an annual rate of 2.6 percent, lower than forecast, compared with a 2.4 percent gain in the prior quarter.
The Fed’s preferred inflation gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent pace, down from 2.5 percent.
The report´s 2.6 percent rate of inflation is especially interesting in comparison to the 2006 rate reported in January 2007:
Last year, the nation’s inflation rate declined to its lowest level since 2003. But now, economists are wondering if the 2.6 percent rate may be about as low as it’s going to get for a while.
So if the inflation rate in Q1 2008 still is 2.6 percent, it also means that, despite all the increases in the price of crude oil, gas, food and a whole range of other commodities, the rate also still is at its lowest level since 2003! Amazing!
Just for example, the price for potash, a vital fertilizer, rose 29% in Q4 207 alone and it had no impact on inflation at all. Downright eerie!
This is especially welcome news because if inflation had been any higher, GDP growth in Q1 2008 would have actually have been negative. Whew, I am so relieved!
This is one place I am skeptical of government reporting. If you believe their numbers on inflation for over a decade, I have a bridge in Brooklyn I want to sell you. The government which has huge commitments in Cost of Living increases for various programs, to include the monster over at Social Security, can’t afford to post something that seems to reflect our common experience on inflation.
Skeptical? Look at this. Clearly there has been a deal in Washington to control COLAs by defining inflation down while creating inflation by running deficits and running an easy money policy. I hope Greenspan lives long enough to see his reputation fall as low as it deserves.
Ralf – You may want to look at what has happened to house prices over the last year, before you come to any conclusions. (They are, as I understand it, a bigger part of most people’s budgets than potash.)
CPI measures house prices in a nonobvious way: imputed rent. Rather than asking what houses are actually selling for, the CPI calculations ask what it would cost to rent an equivalent house.
There are a lot of issues with how CPI is calculated, and not all of them are in the direction of pushing the number down. Suppose that a Wal-Mart or a Costco moves into your area. Groceries are now available for prices that may be 10-20% lower than the equivalent items at traditional grocery stores. You might think this would push down the local CPI, based on the weighted mix of how much is bought in which stores, but in fact the effect on the CPI will be zero. BLS assumes that the negatives of being a Wal-Mart shopper (longer driving distances, ugly stores, whatever) precisely balance out the lower prices.
I doubt that the BLS statisticians are conspiring to make the CPI lower than it should be–the measurement problem is a hard one, and, the more you think about it, the less trivial it seems. I do think that the index probably does understates the “true” rate of inflation.
What’s that smell? Books being cooked?
If the ’70s come back, as they appear to be doing, stagflation will be bad enough. Let’s hope we also don’t get leisure suits.
It’s possible that the ’70s have already come and gone. The economic outlook now appears brighter than it did a couple of months ago. Gold is off 15% from its recent high. The stock market is recovering. Intrade’s 2008-recession odds have collapsed. The odds that Obama will be elected appear to have lessened. The Fed shows signs of having awakened to the threat of inflation. The dollar has appreciated from its low.
Economic events may happen faster now than they used to. They are certainly anticipated (correctly or not) sooner in the media, and reported quicker, than used to be the case. The economy may yet get worse, but it seems increasingly likely that either the worst has passed or that the worst won’t be very bad.
One thing is almost certain. If a Democrat wins the presidential election the media will soon thereafter notice a remarkable economic recovery.
I’m suspicious of the government’s inflation figures, too, but I have to caution against bringing in a structural change in supply or demand as a component of inflation. Inflation is a monetary phenomenon (here I genuflect before the icon of Milton Friedman at the top of the page). When all prices move the same way, it is a good indication that there is inflation going on, but that is the effect of inflation, not inflation itself. When the price of one class of goods changes with respect to the prices of all other classes, that is not inflation. That is a real structural change in supply and/or demand. Both phenomena can be caused by stupid government policy, but pressing interest rates down is inflationary; failing to build enough oil refinery capacity, build nuclear power plants, or explore for more oil is not.
The government does not help itself by using “cost of living” interchangeably with “inflation.” To me, they are different things. We are comfortable saying that the cost of living is higher in Massachusetts than in North Carolina, but those costs of living are paid in the same currency.
After reading this article, I doubt the gov’t figures too.
Jim:
There are more homes being foreclosed on than are being bought and sold. As long as the bottom for house prices has not yet been reached, there are and will be too few buyers and therefore too few regular market transactions for new market prices for homes to emerge – catch 22, at least for the immediate future. Even in the long run, there will be less buyers than there used to be, for a lot of people wil be judged to be too risky to lend to.
By the time the price of houses has reached bottom and they are available cheaply or the solvent and creditworthy, that higher price for potash will long since have translated itself into much higher food prices. Not much relief there.
David
On the other hand, there are so-called hedonic improvements. If a product costs more than it used to, but has some features that allegedly represent improvements, it will be rated as not having gone up in price, or at least by much less as the higher Dollar indicates. This method is fine if you really want those improvements and have the additional cash, but if the improvements are meaningless to you, you are stuck with a higher price, i.e. inflation.
As to inflation measures, CPI does understate inflation, and arguably has done so ever since the Boskin comminion´s findings:
(Read the article on money.cnn about the problems with the alleged biases by which the pre-Boskin CPI allegedly overstated inflation).
Core inflation is even worse, for it doesn´t even take price increases in food and energy into account.
So, I don´t think that the people who do the actual measuring work are cheating, but IMHO they are working within a predefined framework that automatically leads to way too low measurements.
Lex:
Well, I for one never stopped wearing tracksuits. Of course, nowadays they are in better color schemes than back then. Mauve with silver stripes is much more tasteful than the fir tree green I used to prefer.
Jim:
There are more homes being foreclosed on than are being bought and sold. As long as the bottom for house prices has not yet been reached, there are and will be too few buyers and therefore too few regular market transactions for new market prices for homes to emerge – catch 22, at least for the immediate future. Even in the long run, there will be less buyers than there used to be, for a lot of people wil be judged to be too risky to lend to.
By the time the price of houses has reached bottom and they are available cheaply or the solvent and creditworthy, that higher price for potash will long since have translated itself into much higher food prices. Not much relief there.
Jonathan:
I am not quite this optimistic.
Interesting graphic.
No link, Mrs Davis