Ed Dolan's Econ Blog

Key Inflation Measures Slow as Q4 GDP Growth Revised Down to 2.4 Percent

Revised data released today by the Bureau of Labor Statistics showed that U.S. real GDP grew at an annual rate of 2.4 percent in the fourth quarter of 2014, somewhat slower than the 3.2 percent previously reported. Allowing for population growth of about 0.7 percent, the annualized growth rate of real GDP per capita was 1.7 percent. The report also showed that key inflation measures derived from the national income accounts slowed in the quarter.

As the following table shows, the downward revisions affected nearly all sectors of the economy. The one bright spot was the contribution to GDP growth from private investment, which increased from a previously estimated .58 percentage points to .72 percentage points. Furthermore, more of the growth came from fixed investment and less from inventory buildup than previously reported. The contributions from consumption and net exports were both less than previously reported.

The government contribution to GDP growth, as measured by government consumption expenditures and gross investment, was an unusually large negative, -1.05 percentage points. Most of that was due to falling federal spending, especially on defense, but the state and local government contribution to growth turned negative for the first time since last winter. As the next chart shows, shrinking government consumption and investment expenditure has been a drag on the recovery for most of the past four years.

The national income accounts also provide several measures of inflation. The following chart shows three of them. The broadest is the GDP deflator, which shows changes in the prices of all final goods and services produced by the economy. The deflator for gross domestic purchases is based on the prices of goods bought by consumers, business, and government within the United States. The deflator for personal consumption expenditures measures the prices of goods and services bought by households. The PCE deflator is important because it is the basis for the Fed’s key inflation target, set at 2 percent per year. As the chart shows, all three measures of inflation have been running below target.

The various deflators that the Bureau of Economic Analysis derives from the national income accounts provide an important check on the more widely publicized inflation figures for the Consumer Price Index, which are compiled by the Bureau of Labor Statistics. The two sets of inflation estimates are based on completely different data sets and use different methodology. For comparison, the next chart shows trends in the core and all-items CPI, based on data that the BLS released earlier this month. As you can see, the two charts both show that inflation by any measure has been slowing over the past two years, and continues to run below target.

On the whole, the latest revisions confirm what we already knew: The U.S. economy continues slowly to recovery. Federal budget austerity continues to be one of the factors restraining the rate of growth. And an upside breakout of inflation continues to be among the smallest of risks facing the economy.





4 Responses to “Key Inflation Measures Slow as Q4 GDP Growth Revised Down to 2.4 Percent”

Ed Dolan EdDolanMarch 1st, 2014 at 9:39 am

Correction: The link in the first line should read "Bureau of Economic Analysis," not "Bureau of Labor Statistics." The link itself does take you to the correct BEA press release.

windrivenMarch 1st, 2014 at 10:07 am

Sluggish growth. Refractory unemployment. Substantial federal debt. Deflationary indicators outweighing inflationary ones. If the US were suddenly faced with a substantial increase in cost of debt service, we would be well and truly screwed. As luck would have it at the moment there isn't an awful lot of more attractive sovereign debt to soak up conservative investment. But that bit of serendipity, long assumed as birthright by many of our elites, owes now more to inertia than to the intrinsic strength of the dollar or the country that stands behind it.

The economy may be treading water but world events are not. We added perhaps $5 trillion cleaning up after an undisciplined, self-absorbed, and astonishingly truculent financial sector. The question in my mind is whether there is enough money left and the political will to spend it to prevent the US from becoming caught in an eddy of extended economic malaise and creeping irrelevance.

Ed Dolan EdDolanMarch 2nd, 2014 at 10:09 am

". . . Deflationary indicators outweighing inflationary ones. If the US were suddenly faced with a substantial increase in cost of debt service . . ."

This argument–that deflation could trigger a sharp rise in the costs of debt service–is cropping up a lot lately. It seems to be displacing the traditional worry that inflation could trigger a sharp rise in the costs of debt service.

windrivenMarch 3rd, 2014 at 2:11 pm

It isn't so much deflationary pressures alone that I fear would trigger an increase in borrowing costs as a flight from US Treasuries with their very low rate of return (albeit relatively good safety). If the smart money identifies other debt that is deemed sufficiently safe and carries a significantly better return, US debt service costs will necessarily rise. 4% interest – an historically realistic number – would mean debt service costs as high as the Defense budget.