Core PCE Will Include Restaurant Prices

by: Ivan Kitov
The WSJ mentioned that “Restaurant Prices to Flow Into ‘Core’ Inflation Measure”. Effectively, the Bureau of Economic Analysis will include the index for "restaurants" into the core PCE, the "price index for personal consumption expenditures that excludes energy and all food products, whether bought at a grocery store or a restaurant."
It is interesting to evaluate the influence of this new component of the core PCE through the behavior of the CPI of “full service meals and drinks” relative to the core CPI. Following our standard approach [see references below] to small components of the consumer price index, we calculate the difference between the core CPI and the index for “full service".

Figure 1 displays the difference. As with many other components of the headline CPI, the difference is characterized by the presence of a linear trend between 1998 (start time of the index) and July 2008 with a slope +1.82. It means that the core CPI has been growing at a higher rate than the studied index during the past 10 years.

Figure 1. The difference between the core CPI and the index for "restaurants".

A new trend has been emerging since 2008.

Since July 2008, a turn to a negative trend has been observed. Our naive assumption about this new trend is that it will repeat the previous one but with an opposite sign. The green line in Figure 1 represents the new trend.
So, one can expect that the restaurant price index will catch up the core CPI in 10 years from 2009. Therefore, the new core PCE, which will include the index for restaurants, will be growing at a slightly higher rate since July 2009.


Disclosure: no positions