U.S. Core CPI Inflation, GDP Growth and Unemployment

December 21, 2010

One complaint against the Fed’s QE2 program is that such is needlessly taking risks of squandering a “hard-earned” restoration of price stability that took more than a generation to accomplish.  Defenders of the Fed stance have by and large argued against the assumption that quantitative easing will create higher inflation.  QE1 didn’t do that, nor did years of quantitative easing by the Bank of Japan. 

The assertion that reducing inflation was “painful” has not been questioned critically, but perhaps it should be.  The table below juxtaposes the per annum rise of core consumer prices and real gross domestic product, broken down decade by decade.  The final column compares the November 2010 on-year rate of core CPI to the 3Q10-over-3Q09 rate of economic growth.  It is striking that while core inflation has declined steadily since the 1970s, similar rates of economic growth in the 1970s, 1980s and 1990s were barely different from the latest four-quarter pace.  Economic growth was not sacrificed by the process of restoring low inflation.  The last decade, which saw two, not one, recessions including the severest since the Second World War, did experience a weaker rate of real economic growth, but the more recent statement year to 3Q10 has seen a return to trend.  Moreover, U.S. GDP in the current and final quarter of 2010 is very likely to surpass the third-quarter pace and exceed 3.0%.

  1970s 1980s 1990s 2000s Latest
Core CPI 6.7% 5.7% 3.1% 2.1% 0.8%
Real GDP 3.3% 3.0% 3.3% 2.5% 3.2%

% Per Annum


The labor market has suffered a much bigger blow than GDP.  Over nearly fourteen years from September 1994 through July 2008, the U.S. jobless rate had been less than 6.0% except during one sequential 7-month stretch when it peaked at 6.3%.  Unemployment was 5.5% or less without interruption for over five years from June 1996 to November 2001 and again for the four years from July 2004 until June 2008.  In contrast, the jobless rate has been 9.4% or higher over the past 19 reported months beginning in May 2009.  Note that the deterioration in joblessness from a sub-6% range to an over-9.4% range occurred in a time span of less than a year, and it seems unlikely that the jobless rate will fall beneath 9.0% before 2012, if then.  The flip side of decent economic growth and significant above-trend joblessness is very strong labor productivity.  It remains to be seen how long such a wide dichotomy between the performance of real GDP and the labor market can physically be sustained. 

A different matter concerns the tolerance of voters and their politicians for decent GDP growth and inflation but a weak labor market.  Last November’s election suggests that such a situation would be acceptable beyond the short term.  Core inflation of 1-1.5% with economic growth around 3% leaves a majority of voters pretty satisfied even with a near double-digit jobless rate.  I think a trade-off of upwardly trending inflation with lessening unemployment would bother more people than it pleases.  Alternatively, if GDP growth sputters to 2.5% or less, unemployment isn’t going to be improving, either, and there would be a groundswell for policy change under those circumstances.  This month’s fiscal compromise involved exceptional political circumstances, the preservation of tax cuts.  Having secured the highest of all Republican priorities, common political ground to expedite a return to more normal labor market conditions is unlikely to be found again before the 2012 election.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.


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