Inflation: Make vs Buy

Should the Fed be worried about inflation? It depends on whether Bernanke and friends are looking at the prices of what we make, or the prices of what we buy. Take a look at this chart. The blue line is the inflation rate for gross domestic purchases—that is, what we buy. The pink(?) line is the inflation rate for gross domestic product—what we make. In both cases, what’s being measured is inflation over the previous year.

Measured on a year over year basis, prices for what we make—even including food and energy—are rising at a 2% pace, their slowest rate since 2002. In fact, if we just look at this quarter, the price change for GDP was only 1.2%, the slowest rate since 1998!

On the other hand, the prices for what we buy are soaring—up 3.5% over the past year, and rising at a 4.2% rate in the second quarter.

Historically these two indexes move more or less in parallel. The last time they were so far apart was 1980, when Volcker was in the middle of executing his big squeeze. But in that case, they were both very high (roughly 11% for gross domestic purchases, and roughly 9% for gross domestic product). And they were both moving in the same direction—up.

But this time the two indexes are flashing very very different signals. So which one should the Fed look at? What we buy, or what we make?

Before it's here, it's on the Bloomberg Terminal.