Sense on Cents

Anyone with a modicum of ‘sense on cents’ is well aware of the maxim ‘garbage in, garbage out.’

If we are to believe that the inflation data reported by Uncle Sam does not properly capture the true level of price increases in our economy — did somebody say intentionally misleading — then the immediate question begs, what is the real level of economic activity in the nation?

Recall that real GDP is defined as:

A measure of economic growth from one period to another expressed as a percentage and adjusted for inflation (i.e. expressed in real as opposed to nominal terms). The real economic growth rate is a measure of the rate of change that a nation’s gross domestic product (GDP) experiences from one year to another. 

If inflation is under reported, and the rate of change in our economic growth is a known figure, then by definition the output (that is, real GDP) will be overstated. So I repeat my question: What is the real level, that is a more honest and accurate assessment, of our 1st quarter GDP?

Let’s navigate and review the fabulous work of Rick Davis at Consumer Metrics Institute who goes deeper into this analysis than Uncle Sam and his lapdogs might care:

.  .  .  for this report the BEA assumed annualized net aggregate inflation of 1.27%. During the first quarter (i.e., from January through March) the growth rate of the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) was over a half percent higher at a 1.80% (annualized) rate, and the price index reported by the Billion Prices Project (BPP — which arguably reflected the real experiences of American households while recording sharply increasing consumer prices during the first quarter) was over two and a half percent higher at 3.91%.

Under reported inflation will result in overly optimistic growth data, and if the BEA’s numbers were corrected for inflation using the BLS CPI-U the economy would be reported to be contracting at a -3.51% annualized rate. If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been an horrific -5.62%.

We can keep our heads in the sand as Uncle Sam and others might like, but I prefer to actually know the truth so I can have a better read on what is really going on along our economic landscape and . . . navigate accordingly.

Larry Doyle

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This entry was posted on Thursday, June 26th, 2014 at 8:37 AM and is filed under Economy, GDP, General. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.