GDP report shows inflation bite in economy

Here is a notable fact about the economic recovery in the United States: Production adjusted for inflation in the last quarter was only...


Here is a notable fact about the economic recovery in the United States: Production adjusted for inflation in the last quarter was only 1% below what it would have been if the pandemic had never happened.

Here’s another one: Ignoring inflation, output is 1.7% above where he would have been absent the coronavirus.

These two facts help explain the confusing and contradictory nature of the economy of the end of the pandemic. On the one hand, the recovery has been remarkably fast both by historical standards and by what forecasters were expecting at the onset of the crisis. On the other hand, a surprising surge in inflation prevents the economy from rebounding faster or feeling more normal. And to some extent, the same forces – the remarkable levels of aid provided by the government and the unusual nature of the pandemic recession itself – are responsible for both trends.

The chart below helps tell the story. Inflation-adjusted gross domestic product (the dark blue line) has rebounded strongly since the early months of the crisis, but has yet to return to its pre-pandemic trend. This may not seem too surprising; businesses have mostly reopened, but the pandemic is still restricting daily activities, at least for many people.

But the second line of the graph, in light blue, shows that the story is a bit more complicated than that. In non-inflation-adjusted terms, gross domestic product — simply put, everything we earn and spend in any given three-month period — is significantly above its pre-Covid trend. In terms of dollars, we are producing and spending as much as ever. But because of inflation, those dollars are worth less than before.

The basic story here is simple. The reopening of the economy after the initial shutdowns has led to a surge in demand, which has been bolstered by the trillions of dollars in aid the federal government has provided to households and businesses. But supply chain bottlenecks, labor shortages and other issues have prevented companies from fully meeting that demand. High demand and limited supply are a recipe for inflation.

What follows is less clear. If companies are able to hire more workers and increase production, supply can meet demand. In this scenario, the dark blue line would start to look more like the light blue line – growth would be strong in terms of real output, not just nominal dollars.

But if supply can’t rebound, either we’ll continue to burn excess demand as inflation, or demand will have to fall. Either way, it would be more difficult for the economy to fully rebound from the shock of the pandemic.

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Newsrust - US Top News: GDP report shows inflation bite in economy
GDP report shows inflation bite in economy
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