Disappearing UK NGDP growth: the culprit

A James Alexander post

According to the UK Office for National Statistics (ONS) the reason for the heavy downward revisions to UK NGDP are due to heavy downward revisions to the implied GDP Deflator. The deflator is “inflation” as measured for national income statistics. It broadly follows the unreliable, because never revised,  UK CPI figures that the BoE tries to manage.


The deflator is unreliable too, but at least mistakes are corrected! This time, to be fair, it looks as though the GDP Deflator has been revised down, bringing it into line with the collapsing CPI.


Which is “right”, who knows?  One suspects that there are a lot more resources at the resource-strapped ONS put into the politically sensitive CPI than the GDP Deflator. Over time the two indices broadly follow each other.

What is undeniable is that the UK is flirting dangerously with deflation. Nominal GDP remains around 2% or so, confirmed by today’s UK GDP releases, leaving zero room for monetary policy errors. It seems as if the UK is not making them, unlike the US, but do the policy makers at the BoE really understand how close they are to disaster? It doesn’t seem so. The culprit remains the same at all the big four central banks, asymmetric inflation targets. Despite protestations of symmetry the tightening bias is plain for all to see whenever CPI is expected to rise to 2%.

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