$$ GDP Price Deflator

Karl Denninger at Market Ticker has hit on something that strikes a chord with me. 

In an address a couple of weeks ago, Bernanke said the Fed had a mandate to maintain inflation at 1-2% per year.  This was news to me.  I thought they had a mandate to keep inflation under control, not to make sure it always existed.  Inflation, of course, is a silent tax on the people.

There are all sorts of measures of inflation.  According to Denninger, Bernanke has indicated in the past that one of his key inflation indicators is the GDP deflator.  Every quarter, nominal GDP is reported.  Then the BEA deflates nominal GDP to get "real" or inflation-adjusted GDP.  

I researched GDP reports through the last several years, and here's a history of the GDP deflator:

2003 = 2.1%

2004 = 2.8 to 2.9%

2005 = 3.0 to 3.3%

2006 = 3.2%

2007 = 2.7 to 2.9%

2008 = 2.2%

2009 = 0.9%

Note the deflator ramped up in 2004-06 as the Fed blew bubbles, and declined steadily into 2009.  But every year except 2009 was above 2%.  In other words, above the inflation mandate Bernanke feels he must maintain. Is it any wonder we got QE1 in 2009?

Compare the annualized GDP deflator reported by the BEA during first three quarters of 2010:

Q1 = 1.1

Q2 = 2.0

Q3 = 2.2

First, it's growing fast.  Second, it's at or above 2% for the last two quarters.  Which makes today's FOMC statement troubling:

"Consistent with its statutory mandate, the Committee seeks to foster . . . price stability. . . [M]easures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its mandate.  Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objective [of 1-2% inflation] has been disappointingly slow."

Huh?

I believe this is one of the reasons why you had Bill Gross of PIMCO on CNBC today warning of the inflationary risks inherent in QE2. 

And as Warren Buffett wrote in his 1977 Fortune article called "How Inflation Swindles the Equity Investor," when stocks are properly thought of as equity-bonds, then stocks are not a hedge against inflation over the long term.