Here’s How To Solve the Real GDP Mystery

How do you get from Nominal GDP to Real GDP? You extract inflation from the numbers. The U.S. Bureau of Economic Analysis uses its own GDP deflator for this purpose, which is somewhat different from the BEA’s deflator for Personal Consumption Expenditures and quite a bit different from the better-known U.S. Bureau of Labor Statistics’ inflation gauge, the Consumer Price Index.

The charts below show quarterly Real GDP since 1960 with the official and three variant adjustment techniques. The first chart is the official series as calculated by the BEA with the GDP deflator. The second starts with nominal GDP and adjusts using the PCE Deflator, which is also a product of the BEA. The third adjusts nominal GDP with the BLS (Bureau of Labor Statistics) Consumer Price Index for Urban Consumers (CPI-U, or as I prefer, just CPI). The fourth chart adjusts nominal GDP using the Alternate CPI published by economist John Williams at

I’ve calculated the latest GDP in all versions to two decimal places to help highlight the differences.

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The PCE and GDP deflators are both the work of the Bureau of Economic Analysis, but as a comparison of official GDP and the PCE-deflated variant illustrate, the rate of inflation can vary significantly, depending on which series the BEA is deflating.

The CPI comes from a different government agency, the Bureau of Labor Statistics, and is calculated quite differently. As an inflation measure, it is much better known than the GDP and PCE deflators, and its growth rate has been higher than the two BEA metrics (see this illustration). If we use CPI as the deflator to compute Real GDP, we see a lower mean, a higher volatility. Note: For an apples-to-apples comparison, I’m using the seasonally-adjusted quarterly CPI (the CPIAUCSL in the FRED repository) since the PCE and GDP deflators are both seasonally adjusted.)

Ever since my original post of this series, I have received several requests for an additional version using the Shadowstats alternate CPI as the deflator.

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I find this “alternate Real” GDP to be interesting (in a bizarre sort of way), but I personally see no credibility in the hyper-negative GDP it produces. On the contrary, I see this chart as further evidence that the alternate CPI, despite its popularity among many critics of government data, is a misguided concept.

Doug Short Ph.d is the author of dshort at Advisor Perspectives.