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CPI and core CPI. Two years later

|Includes:IQ CPI Inflation Hedged ETF (CPI)

Two years ago we published a paper on the presence of long-term sustainable trends in the differences between various components of the CPI in the USA. We started with the difference between core CPI (i.e. CPI less food and energy) and overall CPI. Two Figures below are borrowed from the paper
Figure 1. Linear regression of the difference between the core CPI and CPI for the period from 1981 to 1999. The goodness-of-fit is 0.96, and the slope is 0.67.

Figure 2. Linear regression of the difference between the core CPI and CPI after 2002. The goodness-of-fit is 0.86, and the tangent is -1.57. An elevated volatility has been observed from 2005.
We also suggested in this and later papers on the sustainable trends in the CPI and PPI (see here) that the negative trend shown in Figure 2 should reach some bottom point and turn to a positive trend. It was also mentioned that such processes in the past had been accompanied by an elevated volatility in the difference, i.e. high amplitude fluctuations.
Now, two years later, we plot the difference again and are happy to conclude that our prediction has realized in practice. We announce the beginning of the positive trend, as Figure 3 shows. The trend should be observed at least five to eight years and will be characterized by a faster growth in prices of goods and services not associated with food and energy. We will keep posting on the difference.
Same pivot is observed in many other, but not all(!), differences mentioned in the original paper.


Figure 3. A positive trend has been emerging since December 2010. The differnce will likely grow from 3 in the beginning of 2010 to 11 in 2016. Accordingly, energy and food will lose their pricing power relative to the core CPI goods and services.


Disclosure: no positions
Stocks: CPI