Chart of the day: Real GDP growth

| 31 May 2008 09:41

I don’t trust the U.S. government’s inflation number for measuring real GDP. The annual rate of inflation in this measurement is only 2.2%, while the Consumer Price Index (CPI) is running at a 4.0% clip. That’s as large a differential as you’ll see between two government inflation statistics.

As a result, I have looked at real GDP growth using the official GDP deflator and using annual CPI inflation figures. Nominal GDP is deflated using the official BEA inflation number in red and using the CPI number in blue. The seasonally adjusted CPI numbers are the chart above and the non-seasonally adjusted CPI numbers are the chart below.

What is clear from both of these graphs of real GDP growth over the past 10 years is that economic growth, as measured by the U.S. government, is artificially high at economic turns. This was true in 1999-2001 as much as it is now. Notice the huge gap between the blue and red lines in 2007-2008. The blue lines show annual real GDP growth decelerating rapidly, while the red line shows almost no change.

My ultimate conclusion is that, as the economy turns down, the official GDP numbers have overestimated GDP growth, because they tend to use an artificially low rate of inflation.

avatar About Edward Harrison

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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