• Joe Carson

The Surge in Nominal GDP & Inflation Indicate An Unstable Monetary Background

Updated: Jul 30

In Q2, nominal GDP jumped 13% annualized, consisting of a 6.5% gain in inflation-adjusted output and a 6.1% gain in the GDP price deflator. Q1 Nominal GDP rose 10.9%. There is no so-called base effect in either of those figures as the recession ended in April 2020, and the economy rebounded sharply in the second half of last year.

Double-digit increases in Nominal GDP are rare, and back-to-back quarterly increases are even more so. One has to go back nearly 40 years in 1984 to find a year in which the US economy generated double-digit gains in nominal GDP.

The surge in nominal GDP should be a worrying sign for Federal Reserve policymakers. That's because an expansionary monetary policy raises both output and prices, with nominal GDP rising much faster than inflation. As a result, nominal GDP offers the best assessment of a stable or unstable monetary policy since it includes real output and prices changes.

Nominal stability has been one of the critical goals of monetary policy. In 2003, Fed Chair Ben Bernanke gave a speech at the Federal Reserve Bank of Dallas conference on the Legacy of Rose and Milton Friedman. Mr. Bernnake stated, "implicit in Friedman's focus on nominal stability is the view that that central banks should avoid excessively ambitious attempts to manage the real economy, which in practice exacerbate both nominal and real volatility...Ultimately, it appears, one can check to see if an economy has a stable monetary background by looking at macroeconomic indicators such as nominal GDP growth and inflation."

I would be willing to bet that thirteen percent Nominal GDP growth and 6% inflation in the eyes of former policymakers and monetary policy experts would warn of an unstable monetary background. Investors forewarned.

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