The CPI of food revisited

In 2007, we predicted the evolution of several consumer price indices relative to core CPI in the USA [1]. The past twenty months have revealed high turbulence in the behavior of such major expenditure subcategories as energy, food, housing, etc. We are going to compare our predictions with actual observations and revise the predictions where appropriate. Here we start with the index of food.
Below is an excerpt from the paper, as devoted to food:

“Figure 7 displays the difference between the core CPI and the index for food for the period after 1960. This curve differs from that in Figure 5. The first large change in the difference occurred in 1973 (not in 1979 as for energy) and lasted only 7 years. Around 1980, the difference started to grow from -7.0 to 13.0 in 1996. Between 1996 and 2003, the difference was effectively constant at the level of ~13.5 units of price index, i.e. a lengthy flat segment was observed. After 2003, the difference has been decreasing at a rate of 1.2 units per year, as Figure 8 demonstrates.
Overall, the difference between the core CPI and the food index was always lower than that between the energy index and the core CPI. The largest difference was only around 14 units. Since 2003, the food price index has been slowly catching up the core CPI. Extrapolating the current linear trend one can estimate the intercept point when the food price index will reach the core CPI. According to Figure 8, this will happen in 2014. Such a behavior differs from that observed for the energy index in terms of timing and amplitude, but the overall behavior distinguishing periods of linear growth and bifurcation is very similar. Therefore, principal mechanisms behind the evolution of the food price index are similar to those behind the energy index. They are likely not related to the changes in supply pressure induced by good crops and draughts. These mechanisms have to be a part of economic system itself and should be related to relationships between economic agent not to production of goods and services.

Figure 7. The difference between the core CPI and the index for food between 1960 and 2007. There are three periods of linear trend and two turning periods. The most recent period of linear trend started in 2003.

Figure 8. The difference between the core CPI and the food index between 2002 and 2007. The current period of linear trend will be likely finished in 2014. Since 2003, the food price index has been slowly catching up the core CPI. “


Since 2007, the index for food has been rising at an elevated rate compared to that predicted by the long-term-trend in Figure 8 in the excerpt. Figure 1 displays the difference between the (seasonally adjusted) core CPI and the index for food (beverages not included). A remarkable rally in food prices forced the index for food to grow faster than predicted and the deviation from the trend predicted in 2007 reached ~7 units in 2008. This behavior was likely related to the outstanding rally in oil price finished in July 2008. Correspondingly, almost all prices were driven up. After July 2008, the same prices have been declining at a higher rate sharing the faith of crude oil price. Accordingly, from January 2009, the index for food started to decline in absolute terms at its returning path to the old trend shown by pink line in Figure 1. The current trend, as shown by black line, is far enough from the old one, but the difference has a good speed approaching the pink line.
The pink line intersects the zero line around 2014. The new trend hits the zero line in 2010. Because of the current recovery to the old trend, actual interception should happen somewhere between 2011 and 2014. This interception point will likely to be the turning point to a new trend. Currently, we observe a similar process for the price index of energy. The discrepancy between the turning points for these expenditure categories is of fundamental importance – there are different sets of economic forces behind them.


Figure 1. Comparison of the trend predicted in 2007 and that in 2009. Current change in the index for food shifts the new trend towards the old one.

Conclusion
There are several conclusions about the past and the future of the index for food can be derived from Figure 1.

• The consumer price index for food is sensitive to the changes in the index for energy and crude oil price.
• The deviation from the well established trend in the difference between the core CPI and the index for food observed between 2002 and 2007 has been driven by the outstanding rally.
• The difference between the core CPI and the index for food will be likely increasing in absolute terms by the end of 2009 with a possible stretch into 2010.
• The index of food itself may be decreasing in absolute terms.
• The new trend for the index for food will start emerging somewhere between 2011 and 2014. Since the turn to the new trend, the index for food will start to lose its ground relative to goods and services comprising the core CPI. In other word, food will become cheaper in relative terms.

References
1. 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. 3(2(4)_Summ), pp. 101-112.