The GDP Deflator is the rate required to convert nominal GDP to real GDP. In Q2, the nominal rate was 3.9% and the real was 2.8%, thus the GDP Deflator was 1.1%, at a time when inflation was ticking up at around 5%.
Ed over at Credit Writedowns writes:
The GDP deflator was clocking in at an annual 4.2% clip, whereas last quarter it was a preposterous 1.1% and in Q1 it was a hardly more believable 2.6%. I have been looking for ways to explain this increase in the deflator and can't. If anyone knows, please write me and tell us.
What I imagine they do is:1. Collect the data (quantity and price) to arrive at a nominal number that they seasonally adjust for all of the components of the GDP like imported goods for example.
2. They take this seasonally adjusted nominal figure and match it with a price change figure which is the deflator to get real GDP changes in sub components of GDP. This is how one gets from nominal goods imports to real goods imports.
3. They also then roll up these numbers in a weighted average into a GDP deflator. As imports are subtracted from GDP, that particular item actually DECREASES the GDP deflator.
4. The GDP deflator can then be used to take nominal GDP, which is an aggregation of the nominal sub-components, in order to compute Real GDP.