In 2019, the annual inflation rate in the U.S. based on the GDP deflator was 1.8%,...

In 2019, the annual inflation rate in the U.S. based on the GDP deflator was 1.8%, while the inflation rate based on Personal Consumption Expenditures (PCE) deflator was 1.5%. Provide two possible explanations for this difference between the inflation rates calculated from the GDP deflator vs the PCE deflator?

Expert Solution

Answer - GDP deflator measures all the goods and services and PCE measures only consumer goods. Based on this , the posible reason of difference can be

1 - The price of the consumer goods may not have risen equally as compared to the other class of goods because of which the PCE inflation rate is lesser than GDP deflator as GDP deflator has a larger scope of goods in it , not only consumer goods.

2 - PCE index also includes the imported goods but Deflator excludes it. Consumers will import the goods when they are cheaper . This will reduce the Price of their basket for consumer. Hence the PCE inflation rate can be less than the deflator.

Rahul Sunny answered 2 years ago

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