Submitted by ritholtz, Aug 30, 2008 15:55

You are misunderstanding what made this GDP report appear strong. GDP subtracts import. When their prices are rising -- as Oil has -- it makes Inflation for GDP purposes appear much better than it is. This leads to a bizarre and counter-intuitive outcome: Any rise in the price of crude goes into the deflator as a NEGATIVE. This brings the total deflator down, making GDP appear better than it really is. The other effect of the arithmetic is that the full effect of higher imported energy prices on the PCE happens with a lag. Once the imported oil is refined and the product moves up the GDP table from imports to Non Durable Goods consumption, the deflator for gasoline goes up and this is when it hits the PCE. The other problem this creates is that if you have period of rising import prices, the gain in period one goes into PCE in period two, but the effects of that can be masked by the further increase in import prices in period two. What you are seeing is the arithmetic of the deflator. The CPI is showing the effect of higher refined product prices. The deflator shows the effect of higher imported oil prices.

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