In a the latest postI made the following claim:
So why hasn’t the overall inflation rate gone up, as many had predicted? The answer is simple. All cumulative inflation from 2019 is part of demand, and demand inflation is permanent. PCE inflation over the past 5 years has exceeded the Fed’s 2% target by nearly 8%. NGDP growth exceeded 4%/year for a total of approximately 10%. That’s the whole problem—asset shocks have nothing to do with it. If anything, we’ve had enough of a supply shock (mainly immigration) to hold inflation to 2% below what you’d expect from the oversupply stimulus. The Fed was really lucky.
I need to revise that last line to say: The Fed really got it a lot you are lucky.
Today, the government announced revised estimates of GDP growth between 2021-23. Bloomberg has a graph showing real output data, but NGDP was updated by the same amount:
A few observations:
In 2022, I had a debate with some who were commenting on whether we had declined. I said no, and they pointed to two negative components of real GDP growth. I responded that this was not the official NBER index, and that other data showed a stronger economy. The updated data shows that there were not even two negative episodes. There was no recession in 2022, by any reasonable measure.
In my previous letter cited above, I mentioned a 10% jump in NGDP growth. With updated data the overshoot was 11.5%, which provides evidence that monetary policy was more extreme than we thought, and also confirms that “asset shocks” were not the problem. The strong supply side held headline inflation to around 8%, or 3.5% less than one would expect from monetary policy alone. On the other hand, economic strength may be slightly higher than we thought, perhaps due to immigration, but perhaps also reflecting productivity growth.
Previously, the data showed stronger growth in GDP than GDI, although the two are conceptually similar. Gross domestic income was revised much higher than GDP, so that gap is now much smaller.
Those previous estimates of GDI growth (yellow bars) never made sense given the strong employment growth.
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