Re-estimation of price inflation in the US by correction for the change in the Federal Reserve's assets from 2010 to 2021

 Currency devaluation is a process different from price inflation driven by economic factors. The helicopter money poured into an economy is an equivalent of devaluation – one gets more units of payment without a corresponding change in the amount of goods and services to buy. The US Federal Reserve inserted money through various mechanisms since 2009 as Figure 1 shows (borrowed from the Reds website). One can see that the 2020 surge was extremely large like an explosion. We discussed this effect and described its effect at the current inflation estimates. We are expecting price deflation in the second half of 2022. 

The model linking the change rate of the real GDP per capita, rGDPpc, and of the unemployment rate, u, is critically dependent on the estimates of both parameters. The reaction to the measures of the Federal Reserve between 2009 and 2020 should be similar to that to the asset growth in 2020 and 2021 – devaluation measured as price inflation. The difference between real economic behavior and money speculations should be seen in the long-term evolution of the economic link between rGDPpc and u. There was no devaluation factor before 2009. Thus the introduction of such a significant factor into major economic measures (aggregate money influence on nominal GDP) should be manifested as a structural break in the rGDPpc and u link. We have found such a break in 2010 – the coefficient of linear regression was -0.465 before 2010 and -0.26 after. These estimates were made by the RMS-based methods. The regression constant also changed from 0.907 to -0.25. This allowed fitting the data between 2010 and 2019 as Figure 2 shows. The regression coefficients estimated for the period between 1979 (major definitional revision to GDP and unemployment) and 2009 (shown in red) fail to predict the rate of unemployment from the real GDP per capita. Nevertheless, even the updated model fails in 2020, as discussed in this post. 

Considering the (helicopter) money injected into the US economy we suggest that the economically based estimates of real GDP per capita were distorted by devaluation added to actual economically driven price inflation. This hypothesis suggests that the real GDP values were underestimated as the US inflation rate was overestimated. In this case, the regression coefficients obtained for the period 1979 to 2009 should be valid and we can estimate rGDPpc from u using the long-term link. To predict the correct inflation rate and thus the real GDP we introduced a linear function changing from 3.8% in 2010 to 2.8% in 2019. This is needed to match the Federal Reserve history in asset change during this period (Figure 1) as the money injection was not constant in time. Figure 3 compares the published and corrected rGDPpc estimates and Figure 4 presented the model fit between 2010 and 2019 with the original regression coefficients. Figure 5 compares the change rates in the rGDPpc for the corrected and published values. The actual rate of price inflation was lower than published by the difference between the corrected and published rGDPpc values as Figure 6 illustrates. 

The price inflation correction suggests that the real GDP per capita has been growing at an average rate of 3.2% per year between 2010 and 2019 instead of the published value of 1.5% per year on average for the same period. This is the result of the Federal Reserve's money support. This 1.7% change rate difference fits the total amount of assets: the GDP of 20 trillion per year times 0.017 = 0.34 trillion per year or 3.4 trillion in total between 2010 and 2019.  The injected money added its fake value to the economically based price inflation. The rGDPpc-u link between 1979 and 2009 is still working when cleaning the inflation data. Figure 4 shows the unemployment rate predicted curve based on this link. For the predicted curve, the real GDP per capita has to drop by 8.1% in 2020 and increase by 7.5% in 2021. Figure 4 presents an estimate for 2021: $67,200.

 

Figure 1. Federal Reserve assets

 

Figure 2. After 2010, the link between rGDPpc and u with the updated regression coefficients (black) and with the regression coefficients obtained for the period between 1979 and 2009 (red). Before 2010, the original time series is presented by black dots.  

 

 Figure 3. The published (red) and corrected (black) real GDP per capita between 2010 and 2020.  For 2021, the model estimate is $67,200.

Figure 4. The fit between the measured and predicted rate of unemployment for the corrected rGDPpc.

 

Figure 5. The change rate in the rGDPpc for the published and corrected estimates.

 

Figure 6. The difference between the published and corrected inflation rate as obtained from Figure 5.