Prices Need To Decline To Kickstart Real GDP Growth. Don’t Hold Your Breath.

Prices Need To Decline To Kickstart Real GDP Growth. Don’t Hold Your Breath.

Prices need to fall across the economy to really kickstart economic growth to the point where Americans can feel it. Unfortunately this is not going to happen. Prices and interest rates will plateau, yet they will remain elevated as the economy stalls. We have a word for this economic condition – Stagflation.

If you regularly read these pages you know we believe that Government reported CPI figures understate the real world price increases of the past two years. For example, Food is up 13.5% for the year per the CPI as of most recent reading. Anyone who shops for food knows that the cost of groceries is somewhere between 30-50% higher year-over-year depending upon your family’s dietary habits. Other CPI categories similarly have understated price increases. The implication of course being that Real GDP figures are overstated as an understated GDP Deflator is applied to Nominal GDP to calculate Real GDP.

If you subscribe to this logic, you realize that the economy is not growing on a units sold basis – economic growth of late is purely a function of price increases. If you do not believe me, take the time to compare your living expenses this year versus a year ago. If you peel the onion you will quickly realize that you have not purchased more stuff, but the cost of your stuff has gone through the roof.

The combination of price increases and higher interest rates has caused prices for discretionary items such as luxury homes and used cars to decline. That’s a start, but it is not sufficient to kickstart economic growth. Consumers are suffering as prices for non-discretionary goods and services remain elevated. Personal savings rates have declined. Credit card balances have expanded at a time when interest rates are moving higher. It is going to take more than slowing price inflation to kickstart the economy and get it growing to a point where we not only see it in the bogus Government statistics, but we can feel it.

The economy is going to get worse:

  • Interest rates are going higher, not lower.
  • Personal wealth will further decline as home values and equity values decline. This will act as a wet blanket on economic growth as consumers and companies consume and invest less as each feels poorer compared to a year ago.

Prices for all goods and services need to move significantly lower in order to kickstart growth. That’s not going to happen. Prices may plateau, but they will remain elevated as will interest rates. We have a word to describe this economic condition: Stagflation.