Sustainable Linear Trends In CPI And Core CPI

Includes: DIA, QQQ, SPY
by: Ivan Kitov


Consumer prices of energy and food are growing at a lower rate than the headline CPI.

This trend started in 2011.

This trend will be observed for another 10 years.

We found sustainable linear trends in the difference between the headline and core CPI in 2007. We also were the first to suggest that the linear trend between 2002 and 2008 to be reversed to the opposite after an extended period of strong fluctuations. These findings are currently validated by six years of observations - the studied difference is on a sustainable linear trend since 2011. When extended into the second part of the 2010s, this trend implies that the joint consumer price of food and energy will be falling against other consumer goods and services in the headline CPI.

We have been routinely reporting on the difference between the headline and core CPI since 2008. Figure 1 illustrates our general finding that this difference can be well approximated to a set of linear trends. The last trend likely finished in 2009. That's why we expected a new trend to evolve since 2011 into the late 2010s.

The U.S. Bureau of Labor Statistics has reported the estimates of various consumer price indices for January 2014. Figure 2 shows the predicted trend and the actual difference since 2002. The studied difference has been fluctuating around the zero line between 2009 and 2011 and then showed a turn to the early predicted trend (Figure 3). Essentially, the zero difference suggests that the core and headline CPI are practically equal and evolve at the same monthly rate, i.e. the joint price index of energy and food has been following the price index of all other goods and services (the core CPI) one-to-one. Figure 4 shows that the new trend has finally stabilized and the observed difference between the core and headline CPI (normalized to the headline CPI) demonstrates no large deviations from this trend. The slope of 0.0021 per year is similar to that observed between 1987 and 1999. This is a good indicator that the next 10 years the difference will follow the current trend, i.e. the core CPI will grow at a lower rate than the other CPI components.

Figure 1. Two trends in the difference between the headline and core CPI.

Figure 2. The evolution of the difference between the core and headline CPI since 2002.

Figure 3. The evolution of the difference between the core and headline CPI since 2010.

Figure 4. The new trend is similar to that between 1987 and 1999. The duration of the new trend will likely be similar, i.e. 12 years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.