In one recent postI made the following statement:
So why wasn’t the headline inflation rate transitory, as many had predicted? The answer is simple. All cumulative inflation since 2019 is demand-side, and demand-side inflation is permanent. PCE inflation has exceeded the Fed’s 2% target by a total of nearly 8% over the past five years. NGDP growth is over 4% per year, totaling about 10%. That’s the whole problem; supply shocks have nothing to do with it. In any case, we have had enough positive supply shocks (mainly immigration) to keep inflation 2% below the level you would expect from the extreme demand stimulus provided. The Fed actually got lucky.
I have to revise that last sentence to: the Fed actually got it terribly happy.
Today the government announced revised estimates of GDP growth for the period 2021-2023. Bloomberg has a graph showing the data for real output, but the NGDP has been revised by a similar amount:
A few observations:
In 2022, I had a debate with some commentators about whether we were in a recession. I said it wasn’t, and they pointed to two negative quarters of real GDP growth. I responded that this was not the official NBER benchmark and that other data showed a strong economy. The revised data shows that there were not even two negative quarters. There was no recession in 2022 by any reasonable criterion.
In my previous post cited above, I mentioned a 10% overshoot in NGDP growth. With the revised data, the overshoot was 11.5%, proving that monetary policy was even more excessive than we had thought, and also confirming that “supply shocks” were not the problem. A strong supply side kept excessive inflation at roughly 8%, or 3.5% lower than what one would expect from monetary policy alone. On the positive side, the potential of the economy may be slightly greater than we had assumed, probably due to more immigration, but perhaps also due to an increase in productivity.
Previously, the data showed much stronger GDP growth than GDP growth, even though both are conceptually identical. Gross domestic income was adjusted upwards much more sharply than GDP, so that the difference is now considerably smaller.
These previous estimates of FDI growth (yellow bars) were never meaningful given the strong employment growth.