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Is Ben Bernanke Too Inventive?   Trickle-Down Economics, Art Edition
May 22 2008 10:12AM EDT

The Fed Scales Back its Growth Forecasts

A quick note about the new GDP forecasts from the Fed:

Policy makers estimate U.S. gross domestic product will increase by 0.3 percent to 1.2 percent this year, compared to the 1.3 percent to 2 percent growth they predicted in January, according to Fed records released today...
Total inflation will run between 3.1 percent and 3.4 percent, the Fed said, compared with a January forecast of 2.1 percent to 2.4 percent.

It's not true to say, as SAR does today, that if GDP growth is less than inflation, then we've got negative real growth. Headline GDP figures are real, not nominal, and are reduced by a very broad inflation measure known as the GDP deflator.

All the same, a CPI above 3%, accompanied by GDP growth below 1%, is definitely a move in the direction of stagflation. It's also worth noting that US population growth is running about 0.9% per year, so anything below that means that real GDP is declining in per-capita terms.

And yet. Oil's at $135 a barrel, and I remember reading all manner of stuff when it was in the $30 to $50 range about how every $10 rise in oil prices meant half a percentage point being cut off GDP growth. By which yardstick we would be growing at a breakneck pace right now were it not for those pesky oil prices - never mind the credit crunch, housing crisis, and everything else. Obviously, that oil-to-GDP yardstick proved to be faulty. But even so, I think if you told any economic forecaster a couple of years ago that in 2008 oil prices would be at $135 a barrel, they woud have told you that in that event 1% GDP growth would actually be quite a good outcome.

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