Jon Hilsenrath at the WSJ writes that the Fed is “cheering”:
U.S. inflation is slowing after a surge early in the year.
This is good news for Americans, as it means the money in their pockets goes further. It also is welcome at the Federal Reserve, which has been counting on an inflation slowdown. It gives the Fed some maneuvering room in 2012 if central-bank officials want to take steps to bolster economic growth.
And puts up this chart:
But what does it tell you? Not much. Headline inflation fell then rose and appears to be coming down again. Core inflation was 1.7% a year ago and for the past few months has remained at that level after having dropped to 1% late in 2010 and early 2011. Commodity prices have climbed and fallen while labor costs have been mostly negative.
But when you look at real growth what you see is discouraging. The “final” release for the third quarter annualized growth was 1.8%, way below the preliminary estimate of 2.5% given in October. Nominal GDP growth came in at 4.4%, revised down from 5.0% in the preliminary estimate.
The charts below give alternative measures of the nominal spending shortfall. The first is based on the trend between 1987 and 1997. The second on the estimate of potential Nominal GDP estimated by the BEA which shows a marked decrease in potential NGDP since mid 2008, with potential NGDP growth having dropped from 5.5% in the period from 1987 to early 2008 to 3.1% since. Coincidentally, trend growth between 1987 and 1997 was also estimated at 5.5%!
In any case, even if potential growth has fallen over the last three years, the shortfall (or gap) is still significant (6%). So yes, the economy remains depressed and some are “relieved” that inflation is not “taking off”!