GDP Deflator versus CPI
click for larger chart
chart courtesy of Eric Jantzen
In our exploration of how laughable the 3.3% GDP was on Thursday, we looked at the GDP Price Index versus the CPI. I was discussing this via email with Eric Jantzen of iTulip, and he showed me a variation of that, using the GDP Deflator (it should be very very similar to the price index)
Its no coincidence that the current situation resembles past ones where oil prices had spiked. Since more than half of the US Crude consumption is imported, the price and quantity go into all the GDP calculations as a negative.
This leads to a bizarre and counter-intuitive outcome: Any rise in the price of crude goes into the deflator as a NEGATIVE. This brings the total deflator down, making GDP appear better than it really is.
One of the commentators at iTulip added:
The other effect of the arithmetic is that the full effect of higher imported energy prices on the PCE happens with a lag. Once the imported oil is refined and the product moves up the GDP table from imports to Non Durable Goods consumption, the deflator for gasoline goes up and this is when it hits the PCE. The other problem this creates is that if you have period of rising import prices, the gain in period one goes into PCE in period two, but the effects of that can be masked by the further increase in import prices in period two.
what you are seeing is the arithmetic of the deflator. The CPI is showing the effect of higher refined product prices. The deflator shows the effect of higher imported oil prices.
I agree with that assessment.
And as I noted in comments yesterday, this isn’t a grand conspiracy — this is simply the way the
models are constructed. There are inherent biases built in, and this
month’s GDP data reflects that.
Yes, there is some latitude in making certain selections — I am not sure precisely how much — but I do not believe all that huge.
Understand that this is not a political issue, but rather, a quantitative/analytical one, reflecting fair-to-poor econometric modeling, one with an inherent downside bias as to the inflation data, and an upside bias when it comes to GDP and job creation . . .
Its the odd way the model raises GDP when we import inflation that is my beef.
GDP Price Index versus CPI
click for larger chart
Is GDP (via BEA) Measuring Growth or Inflation? (August 2008)
GDP: Lowest Inflation Rate in 5 Years (August 2008)
Inflation in GDP Out of whack – Again
iTulip, 08-28-08, 03:58 PM