As you can see in the table below, monthly inflation gains have slowed markedly, while year-over-year comparisons are coming down quickly. In the first half of 2011, a rising GDP deflator was being subtracted from nominal growth, putting pressure on real growth. The opposite is set to occur in at least the first half of 2012, with a lower deflator taking less of a bite out of nominal growth.
Inflation Gains Slowing
Source: ISI Group.
Lower inflation, higher real growth
Below you can see more easily how inflation impacts real growth. Note the period initially highlighted with the vertical line between the two charts. In late 2008 inflation began to plunge and real GDP eventually surged. Inflation began to accelerate in early 2009 and subsequently we saw growth level out and then downward pressure. Given the improving outlook for inflation in the first half of this year, and a lower deflator, expect real GDP to have an upward bias.
Inflation's Effect on Real GDP
Source: Bureau of Economic Analysis, FactSet, ISI Group, as of September 30, 2011.
Another hit to the first half of 2011 was the headwind of tighter monetary policy outside the United States—even from the European Central Bank, which finally came to its monetary senses later in the year and began lowering rates. Most emerging economies' central banks are also now in easing mode thanks to lessening inflation pressures, a tailwind we believe isn't getting the attention it deserves. The breakdown in the price of gold from nearly $1,900 to less than $1,600 per ounce since August may be singing a lower-inflation-to-come tune.
