I rarely take on the issue of measuring inflation properly because there really is no “right” answer or methodology for it. But in the case of current “growth”, such that it is, inflation actually becomes a far more important component. “Real” growth in the past two quarters has been less than 2%, meaning nominal growth was somewhere around 2.5 – 3.0%. But what if the price deflator had been estimated at a level closer to other metrics?

From the CMI,

“For this set of revisions the BEA assumed annualized net aggregate inflation of 1.26%. In contrast, during the first quarter (i.e., from December to March) the seasonally adjusted CPI-U index published by the Bureau of Labor Statistics (BLS) rose by 2.10% (annualized), and the price index published by the Billion Prices Project (BPP) rose at an annualized rate of 5.35%. As a reminder: an understatement of assumed inflation increases the reported headline number — and in this case the BEA’s relatively low “deflater” boosted the published headline rate. If the CPI-U had been used to convert the “nominal” GDP numbers into “real” numbers, the reported headline growth rate would have been a much more modest 0.96%. And if the BPP index (which arguably best reflects the experiences of the American consumer) had be used as the “deflater,” the economy would have been reported to have been contracting at a -2.30% annualized rate.”

Just like I noted yesterday with regard to the size of revisions, inflation “precision” becomes a much larger issue the closer to zero GDP growth gets, regardless of how poorly it is constructed.

The CMI also noted a curious lack decline in income for going on two years now, a theme that is at the foundation of my recession thesis. In their calculations, the current drop in income is actually worse than 2009,

“And as mentioned above, real per-capita disposable income took another hit: it is now reported to have dropped by an annualized $796 from quarter to quarter. Real per-capita disposable income is now down $209 annually from 1Q-2011 — a full two years ago.”

“Real per capita disposable incomes took yet another hit. The astonishing annualized contraction of real per capita disposable income has now reached -9.21% — dwarfing the -7.52% contraction rate recorded in the first quarter of 2009 (the worst quarterly contraction recorded during the official duration of the “Great Recession”).” [emphasis added]

 

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