GDP, Inflation, M2 and the Economy

The Government issued the recent Q4 GDP estimates. First GDP grew about 3.6% on an annualized basis. We show the GDP and Chained GDP above. From this one may assume that GDP is now consistently growing at a more normal rate.

As is usual, Krugman notes that the GDP chained to 2005 has returned to what it was just when the economy tanked. That is obvious from the above.

The concern is of course inflation. Above we show M2 and the Monetary Stock. The MS has stabilized and M@ is growing but not at any rapid rate which would be of concern. Clearly the banks have absorbed all the money and it is merely circulating to pay for non-productive Government programs. As they say, if not for that it would have been worse.

The M2 annualized growth is quite small and thus should not as of now be a concern

We calculate inflation from the standard equation and it appears to be slowing. M2 growth is easily balanced by GDP growth so that what we see is a low velocity of money and thus a low inflation.

Finally we depict the components of inflation above and this give a quantitative view of the elements and our argument above.

Conclusion: GDP is growing slowly but growing and inflation seems still at a distance. So far so good.