GDP Deflator Inflator !

Final word on this subject (for now).

As previously noted, we are no longer calling the GDP Deflator by that misleading name; untill such time as the BLS models more accurately reflect reality, it shall be known as the GD Inflator.

Here is a visual depiction showing precisely how the Inflator impacts GDP:

GDP Inflator Components


Net GDP Inflator

The last chart is the one that really sums this all up — it shows the total contributions to GDP inflator from Imports.

This chart shows that but for the big price increases of imports (primarily Energy), GDP would have been negative:

Contributions from Imports (i.e., Oil)

charts via Jake at EconomPic Data

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What's been said:

Discussions found on the web:
  1. dblwyo commented on Sep 1

    The charts are beautiful. As it happens Jake and I have been “discussing” them for two days. It turns out that he built them using the deflator directly. In other words you can’t just knock down the %change in GDP by adjusting using the % change in the deflator. The first is the sum of several seperately built economic numbers the latter is prices. Or so at least it appears to me – but then I’m easily confused and don’t understand this clearly. However this whole thing boils down to wanting to know what real GDP is net of the impact of imports, i.e. trade. As a simple experiment why doesn’t somebody just take the GDP tables already under dissection and net out the import and export numbers.

    Oops, did that. The real economy net of imports and exports grew at 1.1% in Q1 and and 0.5% in Q2, YoY. Try it yourself but it I don’t think it’s anywhere near what looks like -1% just eyeballing the charts.

  2. JustinTheSkeptic commented on Sep 1

    Gee, the way the we get these economic numbers reminds me of Plato’s, “Allegory In A Cave.” I wonder if the market is going to finally relize what’s true and whats not this week?

  3. Reinhard commented on Sep 1

    The charts are good and to expose the silly concept of falling imports = lower GDP. More important
    here imo is that Nominal GDP growth was allegedly 4.6%, but Real GDP was announced with 3.3% which implies inflation in the Q2 was 1.3%.
    Now, which ever inflation number of the many published by the B. of Laboured Statistics one picks, Real GDP growth would be somewhere between -2% ( inflation Q1/2= 6.2% )and -3% (average compunded seasonal adjusted inflation in Q2 = 7.6%)

  4. Jake commented on Sep 1

    The numbers I list directly impact the final GDP Deflator at the level I list. Imports removed 4.6% from the GDP Deflator, which is applied directly to Nominal GDP to “create” the Real GDP, which was listed in Q2 at 3.3%. All the numbers I use are directly from the BEA Table 1.1.8 and linked to at the bottom of the post.

    In other words, imports weren’t just 4.6% deflationary, they were 4.6% deflationary taking their relative size to the total GDP Deflator in account(the # was thus MUCH bigger).

    I did the same analysis as dblwyo details (just removing net exports from the picture), but it still doesn’t look remotely like the Real GDP figures presented by the government. Looking at Table 1.1.2 and removing Net Exports, you get growth of ~0.1% the last 2 quarters and -1.1% in Q4 07.

    The whole point is we can’t get an accurate assessment of the economy because the data the government provides is manipulated to present a picture of an economy that is rebounding and they are doing it blatantly / right in front of our eyes.

  5. leftback commented on Sep 1

    Barry, since oil prices have now been falling throughout Q3 and seem set to continue in the aftermath of Gustav, can one make certain predictions about the effect of the “inflator” on Q3-Q4?

    Seems to me this will be a huge drag on the government’s GDP number, and the use of this dubious methodology is going to bite them in the butt. What goes around, comes around eh?

    Are there examples of the effects of oil price busts on these figures? What happened during the early 80s recession? It looks like the next set of GDP numbers might be quite a shocker to the downside.

  6. David Merkel commented on Sep 1

    Barry, maybe you can straighten me out on this one… oil was up 25% in the second quarter (2Q avg / 1Q avg). Since they deduct imports in the calculation of nominal GDP, they have to do a similar deduction in the corresponding deflator. So, a large rise in oil/energy prices leads to a decrease in the deflator, leading to higher “real” GDP. Is that how this is working?

    What that means is that GDP is asking the wrong question. It answers the question: how much more was produced inside the US compared to prior periods, adjusted for the prices on what was produced.

    What I think reflects the sense of the average person in our country is the gross domestic purchase series, which represents how much more has been purchased compared to prior periods, adjusted for the prices on what was purchased. That series shows 0.4% growth over the last year, and 0.1% growth over the last 6 months.

    That’s what I think the core of the story is. You agree?

  7. anon commented on Sep 1

    You still don’t get it.

    Your first chart is fine.

    Your second chart is total nonsense.

    You can’t construct GDP ex import inflation (or deflation as you misconstrue it) without constructing GDP ex the subtraction of imports. When you construct GDP ex the subtraction of imports, you add imports back into GDP. You thereby create for yourself a fantasy world in which you pretend that imports have been produced domestically, thereby resulting in a higher LEVEL of GDP.

    Then you add back import inflation into the domestic mix, coming up with a higher overall inflation number and lower overall real GDP growth, all against a fictitiously higher level of GDP.

    To repeat, by constructing a fictitiously higher LEVEL of GDP in adding back imports, you’ve also constructed a fictitiously higher inflation level and lower GROWTH for real GRP.

    Ironically, your second chart is exactly what Brian Wesbury was talking about. He deliberately constructed a nonsensical version of GDP, the same as yours, to be consistent with a nonsensical version of the deflator. He was the one responding intelligently to a stupid idea for the deflator.

    Finally, your third chart is fine, but for the same reason above, your conclusion is ridiculous; i.e. “that but for the big price increases of imports (primarily Energy), GDP would have been negative”. GDP growth would not have been negative unless you reconstructed GDP to include imports as if they were produced domestically, which to repeat is an absurdity.

    You’re really playing around with some pieces of the puzzle here in a very misleading way. It’s clear you won’t stop trying to prove the erroneous position you’ve dug yourself into.

    Try running this by some reputable blogging economists – like Thoma or Chinn. I really dare you. I guarantee you they’ll support my view in rejecting such an interpretation. Wesbury was totally correct on this particular point, and you remain wrong.

  8. Jake commented on Sep 1


    We’re in agreement that GDP less the import inflator is bunk on it’s own IF presented as being accurate. That is NOT the point. The point IS that the import portion of the GDP deflator is at a ridiculous level and presenting GDP with the import deflator at these levels is just as ridiculous.


  9. anon commented on Sep 1


    On what basis do you claim import inflation is at a ridiculous level?

    I’m sorry, but the rest of your comment makes no sense to me.

  10. anon commented on Sep 1

    Oh, maybe you mean import inflation is high.

    So ridiculous = high.

    Well, it is what it is.

    You still can’t conclude that because import inflation is unusually high, that GDP inflation is somehow misstated.

    It is what it is, once you subtract import inflation from end product inflation for (C + I + G + E).

  11. Jake commented on Sep 1

    Ridiculous because it assumes the U.S. imported ~40% less petroleum products in the quarter (on an seasonally adjusted annualized basis – Table 4.2.1.).

    If the U.S. was able to drop its dependence by that much in just one quarter, I guess the U.S. isn’t nearly as dependent on the middle east as we thought. Want to hear something more likely? The impact of imports on the GDP deflator is too high and GDP is overstated.

  12. anon commented on Sep 1

    You’re changing the argument to one of data. That’s got absolutely nothing to do with defending the erroneous methodology I’ve questioned. I appreciate your input, with respect, but you’re really not the one to defend the methodology put forward in this series of posts.

  13. Jake commented on Sep 1

    point taken, except they are my charts. i never stated the second chart is accurate and should be used as a replacement. the chart simply shows what gdp would have been if calculated using nominal (rather than real) imports.

    not quite sure why this isn’t relevant if my point is the import portion of the gdp deflator is too high. i figure somewhere between the two is more accurate.

    i understand when enough is enough. off to enjoy the rest of the extended weekend…

  14. anon commented on Sep 1

    btw, if you haven’t gone forever, I thought your charts were absolutely terrific, albeit with a little change of context and wording around them, just insofar as my own interpretation would be concerned.

  15. BobC commented on Sep 1

    “You’re changing the argument to one of data. That’s got absolutely nothing to do with defending the erroneous methodology I’ve questioned.”

    Seems to me if the data is flawed, then understanding the methodology doesn’t help. Garbage in, garbage out. It doesn’t seem a stretch to my imagination to think that the methodology is inadequate AND the data is suspect. What the brainiacs seem to miss in their quest for perfect formulas is that 99% of the world doesn’t care about the formulas. All the “common folk” know is that the money they made last year doesn’t buy as much this year. So when they hear a number like a 1. 3% annual inflation they cry bullshit. This is a huge problem because as the eggheads develop theories to manage the economy, they MUST retain credibility. Currently, the methodologies, even if proven quantitatively accurate, have the unintended consequence of no credibility with large swaths of the population. Politically, this is untenable. Those that make the policy will ultimately succumb to the pressures of political reality and do what ever needs to be done to prevent a voter revolt.

    I guess my point is that the methodologies need to be changed so that numbers presented to the public at large aren’t so disconnected with their day to day experience that they are summarily dismissed as lies.

  16. anon commented on Sep 1

    I prefer not to assume the data is flawed until I see proof, and there certainly isn’t any here. And it’s still a separate issue.

    If the public doesn’t want to pay attention to something called the GDP deflator, that’s fine. They normally don’t anyway. They’ve got the CPI to relate to, and it’s the more natural measure for public consumption. The blogs can continue to make all the complaints they want to about the integrity of the CPI, for the usual reasons.

    The GDP deflator measures inflation on GDP. If you want to reject the definition of the first, you reject the second by association. Where does it end? It’s bad enough that some need to invent their own definitions of these things to make the result more “believable”.

    The truth and its understanding are not popularity contests.

  17. ScottB commented on Sep 2

    I have to agree with “anon” and Brian previously in terms of the methodology argument. With higher import prices and a slack economy, it makes sense to me that producers would try to absorb some of the price increase–so that domestic value added (what GDP measures) would be relatively low.

    That brings us to Jake’s point about whether the estimates are reliable, particularly petroleum products. If oil imports didn’t drop in the second quarter–and according to Census trade data, June petroleum imports were a record high–then imports would be higher, and GDP lower (by about a tenth of a percentage point). This isn’t a methodological issue, but an execution issue, which should be addressed but doesn’t change the overall “blipness” of the numbers this quarter.

  18. BobC commented on Sep 2

    “If the public doesn’t want to pay attention to something called the GDP deflator, that’s fine. ”

    Now you don’t get it. The public IS the economy. They don’t pay attention to the equations, but the pay attention to their pocket books. And when there pocket books say things are bad , but the equations tell them something else, guess what – the equations lose. And unlike ballistics where the equations can tell us exactly where a shell is going to land when shot from a cannon, the equations of economics are not quantitative. Ultimately, economics is not a science, but rather a public policy instrument. And public policy is strongly affected by those irrational masses whose irrationality you dismiss as irrelevant. Finally, when the equations don’t fit the observations, then the equations are WRONG. To insist that the models are correct when the evidence says they are not is bad science. I don’t know of anyone that believes inflation was running at a 1.3% annual rate Q2. The model is broken.

  19. anon commented on Sep 2

    So economics is a public policy instrument.

    Good stuff. Let’s outlaw the computation of GDP and the GDP deflator.

    Only the CPI will be allowed from now on.

    All in favor?

  20. BobC commented on Sep 2

    “So economics is a public policy instrument.

    Good stuff. Let’s outlaw the computation of GDP and the GDP deflator.’

    Now you’re being petulant. Where did I suggest abandoning rigor? You seem to think the academic parts of economics can happen in some abstract universe apart from the realities of the actual activity that IS economics. You know – the 99% of the world that doesn’t know what the f*ck the talking heads are talking about. Regardless of how irrational the conclusions of the less economically erudite, those conclusions CANNOT be separated from the economy as a whole because these conclusions are ACTED UPON. So you can sit back and argue all you want about the quality of the models and data, but will that save you from the pitchforks of the mob? Whether you like it or not, it does matter what the ‘ignorant masses’ think about the numbers pumped out by the experts, because they are economically active and represent a far bigger slice of the economy than all of the experts combined. The models are broken because they insist on assuming only rational agents are in the system. That assumption is ludicrous.

  21. Jake commented on Sep 2

    Got this post over at EconomPic regarding the subject, so thought it might be beneficially for those here that may not understand.

    POST: The ‘the import portion of the GDP Deflator Inflation’ quote shows the lack of understanding of the author. By definition the GDP deflator does not contain an import price deflator as GDP does not include imports !! GDP measures the volume of domestic production. That is why it is gross DOMESTIC production

    RESPONSE: you are both right and wrong.

    Right: GDP does exlude imports (the way the BEA does this is through the subtraction of imports from exports getting a net export figure).

    Wrong: To subtract imports from the equation, the BEA takes nominal imports and applies a GDP deflator to the nominal number creating a “real” number (THE IMPORT GDP DEFLATOR). In the latest quarter, the subtracted “nominal imports” were 18% higher (on an annualized basis) and “real imports” 7% lower (on an annualized basis) due to a 25% “deflator” (look it up). This removed 4.6% from the complete GDP Deflator.

    So, igonring whether the reported numbers are right or wrong, my argument is that the GDP equation itself is flawed. Your arguments implies that the U.S. economy is stronger because we paid more in aggregate for our imports, but received less units (i.e. nominal was higher, real was lower). My argument is that had we actually received more units for the nominal amount we paid, the import deflator (YES THERE IS ONE) would be lower and GDP would have been lower than the reported 3.3%.

  22. anon commented on Sep 2

    The mob demands that the GDP deflator be guillotined.

    Long live CPI – and absolutely nothing but CPI.

    Heaven forbid that we maintain another measure that contains different information and additional information, but requires some additional mental effort to interpret.

    I know when I’m beat. I’m not standing in the way of mob rule.


    I agree with everything you wrote, up until:

    “My argument is that had we actually received more units for the nominal amount we paid, the import deflator (YES THERE IS ONE) would be lower and GDP would have been lower than the reported 3.3%.”

    I’m sorry. Everything else was beautiful, but your logic is wrong here.

    GDP does not depend functionally on imports.

    Imports are subtracted from (C + I + G + E).

    (C + I + G + E) is NOT GDP.

    It is (GDP + IM).

    So, when you subtract higher IM from (GDP + IM), it has no effect on GDP or the GDP deflator.

    There’s a real logic problem here. I can’t emphasize enough that subtracting imports from an aggregate that happens to include both GDP and imports does NOT mean GDP is a function of imports. This mistake is being made by virtually everybody on this blog and is driving the fundamental error in interpretation.

  23. me commented on Sep 2

    I hestatae to jump in here again but maybe you will like David Altig, Sr, VP of research at the Atlatna Fed here in Atlanta and Macroblog, instead of Brian.

    “It’s no coincidence that the current situation resembles past ones where oil prices had spiked. Since more than half of the U.S. Crude consumption is imported, the price and quantity go into all GDP calculations as a negative.”

    Exactly. Let me provide an elaboration of the spot-on point made at The visible hand in economics blog. For the sake of argument assume that every drop of oil consumed in the United States is imported, and everything imported to the United States is oil. If we leave exports out of the picture for simplicity, we can think of U.S. consumption as consisting of GDP—everything produced in the United States—and imported oil.

    Suppose, then, that the price of oil rises precipitously. If both incomes and oil consumption are relatively fixed in the short-run, what would we expect to happen? The answer is more expenditure on imported oil and less spending on everything else. As the demand for domestically produced goods and services falls, so would their prices. (Or more generally, they would rise at a slower than normal pace.) Since domestically produced goods and services by definition constitute GDP, GDP-deflator inflation will be low, while the consumer price index (which would include nonexported GDP plus imports) could well be quite high.

    Voila! A simple Econ-101 explanation, with nary an insult hurled at the good folks from the Bureau of Economic Analysis.

    That said, there are plenty of reasons to be cautious in interpreting last week’s report. Mark Thoma has a fine roundup of many fine points by many fine bloggers. To that list I’d add comments by Spencer at Angry Bear, William Polley, Lim at The Skeptical Speculator, Ben Leeson at Working Thoughts, Zubin Jelveh and Felix Salmon (both at, to name a few. But I would delete the suspicion that low GDP-deflator-based inflation suggests shenanigans are afoot.

    So go ahead consipratorialists, let me have it.

  24. Long commented on Sep 3

    Contrast those rather deceitful US GDP stats to the Australian counterpart released earlier today, Q2 08: +0.3% Q/Q real, after 4% (yes, 4%) GDP chain price index; and +2.9% real GDP Y/Y.

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