The Personal Consumption Expenditures (PCE) Index, the Fed’s preferred measure of inflation, rose 0.4% in May as expected. On a year-over-year basis, inflation increased from 3.8% to 4.1%.

At first glance, that’s not great news. However, much of this increase reflects the surge in oil prices we’ve experienced over the past several months. In many ways, the market has already priced this in. It’s yesterday’s news.

Now it’s time for a little GDP math. Look away if you’re squeamish.

The formula for GDP is:

GDP = C + I + G + (X – M)

Where:

• C = Consumer Spending
• I = Investment
• G = Government Spending
• X = Exports
• M = Imports

The interesting part of the latest GDP revision is that growth was revised higher because imports came in lower than previously estimated.

Why does that matter?

Imports are subtracted from GDP. So when the U.S. imports less, there is less of a negative drag on economic growth. Think of it as removing an anchor from the boat, the economy doesn’t necessarily speed up, but it isn’t being pulled down as much.

The takeaway is that the stronger GDP number wasn’t driven by consumers suddenly spending more or businesses investing aggressively. Instead, it was largely a result of trade math.

Lower oil prices, easing geopolitical tensions, and moderating energy costs continue to be the bigger story looking forward. The market is always focused on what’s next, not what already happened.

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