While reviewing Robert Gordon’s book The Rise and Fall of American Growth for Regulation, I found it relevant to dig into the GDP deflator and the Consumer Price Index. The reasons why would take me too far afield.

I knew and know that the CPI still overstates inflation by a substantial annual percentage. But I didn’t know as much about the GDP deflator.

So I looked at the GDP deflator from the first quarter of 1950 to the fourth quarter of 2015, and the CPI in roughly the same period, from February 1950 to January 2016.

GDP Deflator
1950 Q1: 13.49
2015 Q4: 110.29

CPI
Feb. 1950: 23.6
Jan. 2016: 238.1

So now we can compute the annualized growth rate of each.

For GDP Deflator:
13.49(1 + x)^65.75 = 110.29
(1 + x) )^65.75 = 110.29/13.49 = 8.176
65.75ln(1 +x) = ln8.176 = 2.1012
ln(1 + x) = 2.1012/65.75 = 0.03196
1 + x = 1.0325
x = 0.0325
So annualized rate of growth of GDP deflator = 3.25%.

For CPI:
23.61(1 + x)^65.92 = 238.11
(1 + x)^65.92 = 238.11/23.61 = 10.085
65.92ln(1 +x) = ln10.085 = 2.311
ln(1 + x) = 2.311/65.92 = 0.03506
1 + x = 1.0357
x = 0.0357
So annualized rate of growth of CPI = 3.57%.

The difference is about 0.3 percentage points annually.

So if the CPI overstates annual inflation by 0.8 to 0.9 percentage points, then the GDP deflator overstates annual inflation by about 0.3 percentage points less.

Caution: Jeff Hummel tells me that the computers of the GDP deflator regularly reach back and adjust earlier data, unlike the case for the CPI. So take the above with a grain of salt.