Wednesday, 22 of November of 2017

Economics. Explained.  

Gross Domestic Purchases Deflator

October 27, 2017

There are many different deflators that are available.  This one is for gross domestic purchases which measures prices paid by U.S. residents.  It is the one measure of inflation that the Commerce Department talks about when it releases the GDP report.   It is our broadest measure of inflation and contains more than 5,000 goods and services.

The gross domestic purchases deflator rose 1.8% in the third quarter after having climbed by 0.9% in the second quarter. Over the past year this index has risen 1.8%.

Excluding the volatile food and energy components this index rose 1.7% in the third quarter after having risen 1.3% in the second quarter.

However, the current rate of inflation is being biased downwards by a bidding war amongst wireless telephone companies where prices have fallen 13% in the past year.

It is also being held down by a pause in the rate of increase for prescription drugs.  President Trump promised to slow down price increases in prescription drugs by allowing U.S. consumers to purchase drugs from overseas companies and by allowing Medicare to negotiate directly with the drug companies.  As a result, drug prices have slowed from a 7.0% increase last year to about 1.5%.  However, the impact of these two categories — wireless phone prices and drug prices — should prove to be temporary.

Remember that these deflators are weighted measures of inflation.  That means that when a builder switches from using copper pipe to PVC to save money, it registers as a price decline in these particular inflation measures.  Or when a consumer switches from buying butter to less expensive margarine the result is the same.  Thus, the deflator represents a combination of price changes and changes in consumer and business behavior.

The CPI, however, is a fixed basket of goods and services.  So what it shows are price changes only which, to us, is what inflation is all about.   In 2017 we look for the overall CPI to increase 2.1% while the core rate rises by 1.7%.  Going forward we expect the temporary impact of phone prices and prescription drugs to be temporary,  We believe that the inflation rate is headed higher.  With the unemployment rate at 4.2% the economy is at full employment which should boost wages and, at last, that seems to be happening.  Both manufacturers and non-manufacturing firms are reporting sharply higher prices for their raw materials so commodity prices are also on the rise.  A very short supply of available rental properties is boosting rents.  Hence we expect both the overall and core CPI to increase 2.3% in 2018.

Stephen Slifer


Charleston, SC

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