Inflation not defeated, economic indicator warns
Is Inflation Really Under Control? A Closer Look at NGDP Growth
One economic indicator is sending a clear message: inflation is far from conquered, and the Federal Reserve’s monetary policy is still too loose. This indicator is known as nominal gross domestic product (NGDP) growth, which measures economic output before adjusting for inflation.
While other signs may suggest that inflation is receding – such as falling inflation rates, decreasing inflation expectations, and moderating wage growth – NGDP growth tells a different story. In the third quarter, NGDP experienced a surge, growing at an impressive annualized rate of nearly 9% - the fastest growth in 20 years, excluding the numbers seen during the pandemic reopening.
NGDP is considered a crucial signal of how the economy is performing by monetary policy experts, including former Fed Chairman Ben Bernanke. It measures total spending across the economy, and rapid growth indicates that people are spending freely. However, without a significant increase in productivity or labor force growth, this excess spending is likely to result in inflation.
Joseph Carson, an economic consultant, highlighted in a recent analysis that the past three months of NGDP growth have been the strongest since the mid-1980s. He suggests that this rapid growth should prompt the Fed to tighten its monetary policy, a significant shift from the current expectation of rate cuts.
According to the Mercatus Center at George Mason University, monetary policy is currently the loosest it has been since 1997. This suggests that the economy is “warmer” than many believe, as stated by economist David Beckworth.
However, it’s important to consider other factors that may diminish the significance of NGDP growth as a signal. Firstly, NGDP growth could quickly moderate, as the latest data only covers the third quarter. Additionally, there is a divergence between NGDP and nominal gross domestic income (NGDI), which measures output based on total incomes rather than spending. While the two measures should be equal, NGDI has grown at a slower rate this year.
Despite these mitigating factors, there are still indications that the economy is running hot. The stock market has seen significant gains, and the unemployment rate is historically low. Falling inflation does not guarantee a decrease in price pressures, as seen in the 1970s.
Ultimately, NGDP growth is just one piece of the puzzle. While it was strong in the third quarter, it aligns with other data showing that inflation remains high. However, it remains a crucial metric to monitor, and a strong NGDP number for the fourth quarter would indicate that the economy is hotter than anticipated.
Read more: Is Inflation Really Under Control? A Closer Look at NGDP Growth
How does the surge in NGDP growth indicate excess money in the economy and potential inflationary pressures?
Nt increase in productivity, this surge in spending can lead to inflationary pressures.
So why is NGDP growth a cause for concern? First, it indicates that there is excess money in the economy. When there is more money available, people tend to spend more, leading to increased demand for goods and services. This increased demand can push up prices, leading to inflation.
Second, the surge in NGDP growth suggests that the Federal Reserve’s monetary policy may be too loose. The central bank has implemented various measures to stimulate the economy, such as keeping interest rates low and injecting liquidity into financial markets. While these policies have been effective in supporting economic recovery, they also carry the risk of fueling inflation if not properly managed.
Furthermore, the surge in NGDP growth is particularly concerning given the current supply chain disruptions and rising energy prices. These factors can exacerbate inflationary pressures and make it even more challenging for the Federal Reserve to maintain price stability.
Some argue that the surge in NGDP growth is simply a transitory phenomenon, influenced by the unique circumstances of the post-pandemic recovery. They believe that as supply chains stabilize and the economy adjusts, NGDP growth will naturally moderate, alleviating concerns of excessive inflation.
However, others are not convinced. They point to the fact that even before the pandemic, NGDP growth had been consistently strong, indicating underlying structural issues that cannot be ignored. They argue that the Federal Reserve needs to take proactive measures to rein in NGDP growth and prevent inflation from spiraling out of control.
Ultimately, whether inflation is truly under control or not is a complex question. While there are signs of inflation receding in certain areas, the surge in NGDP growth raises red flags and highlights the need for caution. The Federal Reserve must carefully monitor this indicator and take appropriate action to ensure price stability and sustainable economic growth.
In conclusion, the surge in NGDP growth suggests that inflation may not be as under control as some believe. It is crucial for policymakers to recognize the risks associated with excess money in the economy and implement measures to prevent inflation from spiraling out of control. Only through vigilant monitoring and prudent policy decisions can we maintain economic stability and protect the purchasing power of individuals and businesses alike.
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