Real gross domestic product (GDP) increased at an annual rate of 2.1 percent in the second quarter of 2023, according to the "second" estimate just released by the Bureau of Economic Analysis (BEA). In the first quarter, real GDP increased 2.0 percent.
This is great news because it showed our economy was still expanding in Q2, April-June.
Also, the price index for gross domestic purchases increased 1.7 percent in the second quarter, a downward revision of 0.2 percentage point from the previous estimate.
This was more good news. It showed that inflation was still declining.
Then why is the Fed still sounding hawkish in maintaining inflation hasn’t been tamed? I know this can be boring information for most readers. But it might help us to understand why the financial markets are so skittish about inflation, and what the Fed may do next concerning the everyday interest rates that govern debt rates for credit cards and car loans.
Because there is a lot of confusion over which inflation rate the Fed should use to acknowledge they have reached their 2 percent target rate.
We will never really know the underlying inflation rate, because it is a magical number decided upon years ago during Fed Chair Bernanke’s reign that developed countries central bankers could agree on, not because it had some intrinsic value. And sure enough, as the Fed began to raise interest rates to bring said inflation down to 2 percent, a recession has invariably followed.
The Fed seems to like the PCE price index, which measures just what consumers spend (rather than GDP, which measures what everyone spends, including governments). Personal Consumption Expenditures (PCE) increased 2.5 percent, a downward revision of 0.1 percentage point in the BEA’s same press release. Excluding food and energy prices, the PCE price index increased 3.7 percent, a downward revision of 0.1 percentage point, but still too high for the Fed.
But the Consumer Price Index (CPI) that also measures consumer spending is the index used to set social security premiums and most rental leases! And it is currently increasing at 3.3 percent.
I maintain that is the reason there is so much confusion over inflation. The Fed is probably correct to concentrate on the behavior of consumers. Food and energy prices directly affect the consumer, where inflation does the most harm to household finances. But it also casts doubt on the Fed’s ability to control inflation!
The bottom line as I said last week is not enough is being produced to satisfy consumer demand, or the military’s demand for more weapons, or Americans’ need to shelter from the effects of ever greater Global warming.
So, the Fed’s policies shouldn’t even be part of this equation in such a time. Inflation will continue to subside on its own as more is produced to satisfy said demands. The above CPI chart shows the decades post-1990 when supply and demand were in balance—until the COVID pandemic upset that balance, which is being gradually restored.
Harlan Green © 2023
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen
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