We have been reporting on the difference between the core CPI and headline CPI since we found a long-term linear trend in this difference [1]. Figure 1 reproduces the illustration from [1] and shows the change in the trend near 2000.

To distinguish between a short-term excursion from the new trend and the development of long-term negative trend we present a broader view on the core and headline CPI and related rates of price inflation. Figure 3 depicts both indices since 1960. Between 1980 and 2009, the overall CPI was below the core CPI. After the 2008/2009 spike in energy (oil) prices, the CPI fell again below the core CPI. Currently, a new spike is observed in oil price. Therefore, the CPI intersects the core CPI again. All in all, the CPI is more volatile than the core CPI and fluctuates with larger amplitudes.

Figure 4 provides a better view on the volatility in the CPI. The rate of CPI price inflation (monthly estimates of annual inflation) during the past 10 years fluctuates severely around the core inflation rate. In 2010, there were several months of the overall CPI deflation, which was replaced with a new spike in prices. The core inflation has been showing a steady decrease since 2005, however.

Therefore, we confirm our previous predictions and expect the new positive trend in Figure 1 to hold in the future. This trend repeats the trend observed between 1987 and 1999 rather than the mirror reflection of the previous negative trend between 2002 and 2009. Thus, the price indices of food and energy will not be falling too fast relative to the core CPI, but this period will likely last more than 10 years.

The core CPI inflation will fall below the zero line in 2012 manifesting the period of deflation predicted in 2006 [2].

*Figure 1. Linear regression of the difference between the core CPI and CPI for the period from 1981 to 1999 (R*

^{2}= 0.96 the slope is 0.67) and linear regression of the difference between the core CPI and CPI between 2002 and 2009 (R^{2}=0.91, and the slope is -1.59).Figure 2 displays the previous (negative) trend between 2002 and 2008 and the following evolution of the difference. We expected a new trend to be developed between 2008 and 2010 and this new trend should be positive, as shown by the solid red line. However, after a year of “right” evolution the difference has fell to the zero line again. This puts the overall evolution under question.

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

*Figure 3. The evolution of core and headline CPI since 1960.*

Hence, it is natural to expect the current surge in oil price to calm down and the CPI falling back below the core CPI in the next few quarter. In this case, the difference in Figure 1 will return to its new positive trend manifesting a progressive decrease in energy and food prices relative to other goods and services.

*Figure 4. The rate of price inflation as defined by the headline and core CPI.*Therefore, we confirm our previous predictions and expect the new positive trend in Figure 1 to hold in the future. This trend repeats the trend observed between 1987 and 1999 rather than the mirror reflection of the previous negative trend between 2002 and 2009. Thus, the price indices of food and energy will not be falling too fast relative to the core CPI, but this period will likely last more than 10 years.

The core CPI inflation will fall below the zero line in 2012 manifesting the period of deflation predicted in 2006 [2].

- Kitov, I., Kitov, O. (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. III(2(4)_Summ), pp. 101-112
- Kitov, I. (2006). Exact prediction of inflation in the USA, MPRA Paper 2735, University Library of Munich, Germany

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