Subtracting the Rate of Inflation from Real GDP

In order to see how much the volume of output changes, you have to take price changes out of the numbers. It can't be helped.

Does this mean that I am not allowed to compare Real GDP to the Consumer Price Index? Certainly not.

This may trouble you, but I want to compare RGDP and the CPI by subtracting the CPI from RGDP. I want to see how RGDP stands up to that abuse. It is a simple comparison of the rate of inflation to the rate of growth. But it doesn't look like it. It looks like I am trying to take inflation out of Real GDP. You will want to tell me But inflation is already removed from those numbers!

I know you will be tempted to say that, because I am tempted to say it myself. So I have to go around the circle again now and say that I am not removing inflation from RGDP. I am comparing inflation to RGDP. Surely such a thing is allowable.

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1IK2v

The graph uses the annual Real GDP Growth rate, and an annual measure of the inflation rate. I subtract the CPI from RGDP. The first thing you'll notice is a big downtrend from 1965 to 1980. That big downtrend was created by the Great Inflation in those years. We are subtracting big inflation numbers from much smaller RGDP growth figures.

That big downtrend is the most interesting part of the graph. Other than that, the graph shows relatively high values in the years before the Great Inflation, and relatively low values after the Great Inflation. And in those latter years, it seems to me that the graph shows higher values on average from 1983 to 1999 than from 2000 to 2024. I marked up the graph to outline the deep downtrend of the Great Inflation and to show the average value for each of the three other periods:

Same Graph, marked up to highlight some interesting features

The three red horizontals indicate the average level of "RGDP minus CPI" for three periods:

Period	RGDP - CPI	RGDP Avg	Inflation Avg
1948-1965	2.14866	4.10800	1.95934
1983-2000	0.45519	3.72727	3.27207
2000-2024	-0.36669	2.20950	2.57619

From 1948 to 1965, RGDP growth averaged about 4 percent and inflation averaged about 2 percent. So the red horizontal runs near the 2 percent level.

From 1983 to 2000, RGDP growth averaged about half a percentage point higher than the rate of inflation. So the red line runs about half a percentage point above the zero level.

From 2000 to 2024, average RGDP growth was less than the average CPI for the period. And in these years the red line runs below the zero level.

I have only one thing to say about this: Economists spend a lot of time focusing on inflation and talking about the Great Inflation of 1965-1982. They spend little time talking about the decline of economic growth. That is a huge mistake, and a massive flaw in their thinking.

Hey -- the "Great Inflation" ended forty years ago. Yes, inflation came back a couple years ago, and nobody liked it. But the inflation started dying out again within three months when the Federal Reserve finally got around to raising interest rates. The problem was not that inflation wouldn't go away. The problem was that the Fed did nothing about inflation -- nothing except let it get worse -- from March 2021 to March 2022.

Compared to the long-term slowing of economic growth, inflation is a small problem. Slowing growth is the big problem. Slowing growth means slowing job growth and slowing income growth. Slowing growth makes it more difficult to survive a bout of inflation, if and when it comes. 

Slowing income growth means things are not getting better.