Inflation: The Hidden Error in Calculating GDP

The federal government routinely announces perceived quarterly GDP growth shortly after the end of a quarter, and then quietly announces corrections every few weeks as the next quarter progresses and they determine how far off they were.

Typically, therefore, the USA’s GDP number for the first quarter of 2024 started out at 1.6% but has been reduced; it’s now been retroactively reduced to 1.3%, and most analysts expect that to drop again in the weeks to come, almost certainly to a pathetic 1.2% or even worse, as Washington’s math wizards continue to sharpen their pencils.

What should we hope for? Well, if we’re honest, we should just hope for the real number, whatever it is. But there are other desires out there.

It’s an election year; the Democrats currently in charge are therefore most concerned with avoiding the terrifying term “recession.” Whatever the numbers are, as long as they stay positive, the economy can’t qualify for the most traditional definition of a recession: “two successive quarters of negative growth.” Viewed in this context, even a miserable 1.2% number is fine with them, because it’s not negative, so any risk of declaring a recession is kicked forward another quarter.

But is it true? Is it right?

The nation is suffering from unprecedented inflation. It’s been 45 years since we’ve had anything like this, and in some sectors, this is much worse; we are in completely new territory. So, we must look at all economic numbers, first, by asking this question: does inflation affect the numbers?

And therein lies the challenge.

Two important points:

  • Anytime they announce the GDP numbers, they have already taken inflation into account; the publicly announced GDP number is always adjusted for the publicly announced inflation rate, in theory. So, for example (to use highly simplified math to keep this column short), if economists see a 4% increase when inflation is at 2%, they deduct the two from the four, and announce that the GDP growth is at 2%. That’s how it’s always described, and in theory, it makes perfect sense.
  • The problem is, there is massive disagreement about what the inflation rate is right now. Most onlookers agree that inflation has been vastly understated for decades, but especially during the Biden-Harris regime. Most inflation averages leave out food and energy because they tend to be somewhat volatile, but opponents argue that food and energy have skyrocketed so much – from groceries to restaurant dining, from the car’s gas tank to the energy bills of homes and factories – that the exclusion of such figures from the calculation of an inflation rate makes a mockery of the very idea of a publicly acknowledged inflation rate.

Let’s consider what that means. If GDP subtracts inflation, but virtually everyone admits that inflation is considerably understated, then the GDP number itself is almost worthless, because it’s not subtracting enough.

We may not all agree on what inflation is right now – because it may indeed be different for different people – although that’s not really as unusual as it may seem.

If car prices are going up, then that only affects you if you buy a car during that period. You may not buy a car one year, so those increased prices won’t hit you that year. But what if the heavy inflation lasts four years? Can you put off the new car purchase, which has now doubled in price, that long? The inflation in auto purchases will eventually hit everybody.

More important, though, without a doubt, is the impact of inflation on our daily purchases. We all buy food every day. We gas up the car and power our heating, lighting, laundry machines, refrigerator, and computers, every day.

And inflation is therefore considerably higher than the publicly declared 3.4% for virtually everybody, from individuals to businesses.

We may not all agree on the exact market basket to use in these calculations – but some specific market basket is necessary to come up with an agreed inflation rate. Disagreement about this issue therefore affects the real GDP more than most observers realize.

Let’s say you live mostly on milk, pork, and onions. You’ve probably seen very little net inflation over the past 3.5 years in those areas.

But what if you live primarily on eggs, beef, and soda-pop, which have more than doubled in price in less than four years? Then your inflation rate has been somewhere around 25% per year since Biden and Harris stumbled into the Oval Office and started their reign of error.

Now, what about the economists who figure out the GDP? Do you think they buy more beef or more pork? More onions or more eggs? Or, now to be specific: do you think that they will think that last year’s inflation rate was 5%, or 10%, or 30%?

This isn’t a picky little academic exercise. This question affects exactly how much we should be deducting from the apparent economic growth, to result in that “Percentage Growth in GDP” that they announce on the news all the time.

No matter how diligent they are about the inputs selected for the GDP announcement, if they botch the number to deduct for inflation, they’ve rendered the whole process useless.

So… if you think the publicly announced GDP growth over the past couple of years has been hard to believe all along, but you couldn’t quite be sure why – and if you’ve thought we were in recession for a long time and you couldn’t figure out how they keep saying that the GDP is still growing – well, now you have your answer.

If they’re lying about the inflation rate – or maybe a better way to say that is, if they’re undercounting the inflation rate, because they haven’t updated their market baskets to reflect reality – then by definition, they’re overstating the level of GDP growth.

Because at a growth factor as miserable as 1.6% or 1.3%, when you have to take even more inflation out of that number, you’re going to land in “recession” territory pretty darned quickly.

Some of us have maintained that we’ve been in recession for well over a year now. Lots of people refuse to admit this, though the signs are all around them.

I would argue that this specific aspect of the issue explains why even well-intentioned economists get this wrong.

Of course we’re in recession. Jobs have dried up, wages aren’t keeping up with the cost of living, houses and cars have become unaffordable, and even fast food is now viewed as a luxury by most Americans.

We’re in bad shape, any way you look at it, and the only way out is for the architects of Bidenflation – the Democrats currently holding the reins of power – to be kicked to the curb on Election Day.

Copyright 2021-2024 John F Di Leo

John F. Di Leo is a Chicagoland-based international transportation and trade compliance professional and consultant.  A onetime Milwaukee County Republican Party chairman, he has been writing a regular column for Illinois Review since 2009.  His book on vote fraud (The Tales of Little Pavel) and his political satires on the current administration (Evening Soup with Basement Joe, Volumes III, and III), are available in either eBook or paperback, only on Amazon.

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