The GDP report shows the level of inflation in the economy

Here is a remarkable fact about the US economic recovery: Output adjusted for inflation last quarter only 1% below what would be if the pandemic had never happened.

Here’s another one: Ignoring inflation, output is 1.7% above where it won’t have coronavirus.

Those two facts help explain the confusing, contradictory nature of the economy at the end of the pandemic. The recovery, on the other hand, has been remarkably quick both by historical standards and compared to what forecasters expected when the crisis began. On the other hand, a surprising increase in inflation is preventing the economy from recovering faster, or feeling more normal. And to some extent, the same forces – the substantial levels of government-provided aid, and the unusual nature of the pandemic recession – are responsible for both trends.

The chart below helps tell the story. Inflation-adjusted gross domestic product (dark blue line) has recovered strongly since the early months of the crisis, but has yet to return to pre-pandemic trends. That doesn’t seem too surprising; Businesses have mostly reopened, but the pandemic is still holding back day-to-day activities, at least for many.

But the second line on the chart, in light blue, tells the story a little more complicated than that. In non-inflation adjusted terms, gross domestic product – in a word, everything we earn and spend in a given three-month period – has increased significantly from the previous trend. Congregation. In dollar terms, we are producing and spending more than ever before. But because of inflation, those dollars are worth less than before.

The basic story here is simple. The reopening of the economy after initial shutdowns has boosted demand, supported by trillions of dollars in aid the federal government provides to households and businesses. But supply chain bottlenecks, labor shortages and other problems mean businesses can’t fully meet that demand. Strong demand plus limited supply is a recipe for inflation.

What happens next is less clear. If companies can hire more workers and ramp up production, then supply will be able to meet demand. In that scenario, the dark blue line would start to look like the lighter blue line – growth would be strong in real output, not just nominal dollars.

But if supply cannot recover, then either we will continue to burn through excess demand in the form of inflation, or demand will have to fall. Both scenarios will make it difficult for the economy to fully recover from the shock of the pandemic. The GDP report shows the level of inflation in the economy

Fry Electronics Team

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