According to official statistics the US and UK economies are still growing, albeit very slowly, however these official statistics have been subject to years of government tinkering without which it becomes very hard to produce positive figures. In fact it’s safe to say that the US and UK are already in recession.
The real GDP of a country is calculated using the GDP deflator and is calculated by dividing nominal GDP by the GDP deflator and multiplying it by 100.
According to the Bureau of Economic Analysis real gross domestic product (GDP) in the US increased at an annual rate of 1.3% in the second quarter of 2011, while inflation came in at 3.6%. If however inflation was actually higher than the official figure, GDP would be lower.
The way in which the US authorities calculate inflation has changed many times over the years, each time resulting in a reduced figure for the consumer prices index, CPI. One of the most well known methods used to underreport inflation is that of substitution.
As meat prices rise, consumers might switch from buying steak, to buying minced beef, therefore avoiding the higher price of steak. The basket of goods tracked by the CPI will then substitute steak for mince beef whereupon authorities can report that CPI, i.e. the cost of living has not increased.
Substitution is just one way in which changes to the way CPI is calculated have depressed the reported rate of inflation. The consumer prices index therefore no longer measures the cost of maintaining a constant standard of living.
The True Rate Of Inflation
Thanks to a US service called Shadow Government Statistics it is possible to track the true rate of inflation in the US. The chart below shows both the official CPI figure and the alternative figure calculated by Shadow Government Statistics using the methodologies that were in place in 1980 – before the manipulation began. The Shadow Stats inflation figure (the blue line) is a shocking 11%.
Chart courtesy of shadowstats.com
If the 11% inflation figure were to be used in the deflator instead of the government’s manipulated 3.6% figure, then US GDP would actually be negative. Using some rather crude calculations I calculate that the US economy is actually contracting at around 4% per year.
Even this crude calculation highlights the motive governments have for underreporting inflation. It also helps explain why the US is experiencing a “jobless recovery”.
Sadly shadowstats.com doesn’t report the true rate of GDP here in the UK but which the official rate already at 4.4% for July and official GDP at just 0.2% I think it’s safe to conclude that the UK is also in recession.