August 03, 1998

The Commerce Department announced last Friday the preliminary gross domestic product figures which showed the U.S. economy expanded at an annual rate of 1.4% in the second quarter. The performance surprised many Wall Street economists who had been expecting a flat quarter. The GDP implicit price deflator increased at an annual rate of 0.9 %--economists were expecting 1.5%. The figures show that, on average, economists overestimated inflation and underestimated real growth. Absent a perfect application of the price rule, the two forecasts are not truly independent. Since we view inflation as too much money chasing too few goods, we would expect that when economists underestimate real growth, they would overestimate inflation.

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