RV Blog Harrison: Inflation is a Proxy for GDP

Harrison: Inflation is a Proxy for GDP

Your Real Vision Daily Briefing for August 28, 2020

Ash Bennington and Ed Harrison react to the new U.S. consumer spending report out today from the Commerce Department.

  • Despite gains for three consecutive months, consumer spending momentum fell as the COVID-19 pandemic lingers and fiscal support dries up.
  • Inflation is a replacement for nominal GDP growth; what we really need is sustainable nominal GDP growth and the Fed should target their monetary policy toward that.
  • The Fed may need to retire the use of the Phillips Curve as low inflation and low unemployment have coexisted in the U.S. for some time.


Get the latest information as we analyze the next phase of our new global economy and discuss what we think is to come.

Consumption numbers today were weak as the global health crisis continues and fiscal support has expired, Ed Harrison told Real Vision during today’s Daily Briefing.

Harrison said we’re only getting about 1% growth on consumption and that’s not going to do it in terms of a V-shaped recovery. He questioned what that will mean for the data we have yet to see in August and beyond and wondered what it will take for the real economy to dent a market trading at 25- or 26-times earnings.

Harrison also discussed inflation and his view that it is a replacement for nominal GDP growth. What we really want is to have is sustainable nominal GDP growth and the Fed should target their monetary policy to keep it on trend for a longer period of time, he said. If it goes above trend, he believes they should raise rates to tighten and if it goes below, they should do whatever it takes to bring it back to trend. The Fed has the tools to influence nominal GDP in that way, he said.

Harrison wrapped up the interview with his thoughts on the Phillips curve, the basic tenet of which is that when unemployment goes down, inflation rises. He talked about how people are now questioning the theory because we have seen that unemployment can be low and inflation low at the same time, which has been the case in Japan and to a lesser extent in the U.S. Fed Chairman Powell said a robust job market can be sustained without causing an outbreak of inflation, which suggests they’re not worried about the Phillips Curve any longer.

Harrison said he has qualms about what the Fed is saying right now because the U3 and U6 numbers are not complete numbers. If you’re not taking into account that some people aren’t even looking for a job because their prospects are so low, are you really measuring what you think you’re measuring, he said.

Harrison said he can’t say the Phillips Curve has no applicability but he doesn’t like the mentality that the Fed should use a cadre of unemployed people as a toggle to be able to speed up and slow down the economy.

He argued that even if inflation is low and we get to 3.5% unemployment, the Fed could say unemployment is too low so let’s preemptively raise interest rates to make some of those people unemployed to make sure inflation doesn’t get out of control.

“If the unemployment rate gets too low, the Fed will to jack up rates so some of those people become unemployed. It’s perverse,” he said.

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