Hooray, Inflation Lowest Since 1963!!

According to the government, real GDP growth came in at a "greater than expected" 3.9% for 3Q2007. The key word here is REAL, i.e. inflation adjusted. Naturally, the lower the inflation figure used (the GDP deflator) to convert nominal dollars into "real" dollars, the higher the reported "real" GDP growth.

Nominal growth, in current dollars, was reported as 4.7% for the third quarter, versus 6.6% in the second quarter. In other words, the economy slowed down. But the government also reported that inflation for GDP purposes in the 3rd quarter was ... 0.77% annualized. No, that's not a typo. Incredulous? You should be, because that's the lowest GDP deflator figure since the third quarter of 1963. Yes, 45 years ago - see the chart below.

GDP Deflator Data: BEA

The last time inflation was reported to be this low Martin Luther King gave his "I have a dream" speech, the US had 15.000 troops in Vietnam (they still called them "advisors"), Lawrence of Arabia won the Oscars and The Beatles were becoming famous. Oh ... and Kennedy was shot.

The deflator supposedly collapsed (down from 4.2% in the first quarter and 2.6% for the second) while crude oil and food prices were zooming. C'mon.. who's kidding whom here? If we use the average of the first 6 months of 2007 as the deflator for the third quarter (3.4%), then reported "real" GDP growth would have been 4.7-3.4 = 1.3%. This provides a better picture of reality, in my estimation.