by Calculated Risk on 1/12/2007 02:32:00 PM

UPDATE: I had the title backwards. Trend real GDP is probably around 3.2% and nominal GDP is probably in the 5% to 6% depending on inflation. Since real GDP equals nominal GDP less inflation, it is unusual for real GDP (or real PCE) to be greater than their respective nominal values - unless the PCE and GDP price deflators decline.

Original Post: It is possible in Q4 that real PCE (and maybe real GDP) will be greater than the nominal value. If so, this hasn't happened since the early '50s. This is another way of saying reported inflation was negative for the quarter (I don't want to use the term "deflation").

Click on graph for larger image.

This graph shows Real PCE minus nominal PCE quarterly since 1947 (also GDP).

Looking at the monthly PCE price index, it appears the PCE price index will decline in Q4. This means that real PCE (and probably real GDP) will be higher than expected.

Is this drop in inflation because of "one-time" changes, and inflation is actually higher, and GDP lower, than what will be reported? That seems to be the view of Fed Vice Chairman Kohn this week:

"Core inflation is still higher than it was just a year ago, and, as I noted, some of the very recent decline may result from one-time changes in relative prices rather than an easing in underlying inflation pressures."

If Kohn is correct about inflation being higher than reported due to "one-time" changes, then the same argument can be made about GDP (lower than reported).