The CPI of transportation revisited

We continue revising our predictions of the CPI subcategories from 2007 [1]. The past twenty months have revealed high turbulence in the behavior of the index for transportation. Here we are going to compare our predictions with actual observations and revise the predictions where appropriate. We have started with the index of food and continue with the index for transportation.
Below is an excerpt from the paper, as devoted to transportation:

“The difference for the transportation index had a longer period of positive slope – between 1980 and 2004, as Figure 11 demonstrates. During this period the difference was evolving at a rate of 1.5 units per year and reached the level of 30 units of index. Currently, a turning period is likely observed and a negative slope is developing. The current period is accompanied by an elevated volatility. The slope for the future linear trend, which is estimated as -1.25 units per year in Figure 12, will be possibly changed in near future but will define the duration of the recovery period for the transportation index. In any case, the prices for goods and services related to the index for transportation, as it defined by the BLS, are very likely to be growing faster than the headline CPI.

Figure 11. The difference between the CPI and the transportation index between 1960 and 2007. Notice two clear periods of practically linear trend: between 1960 and 1980; between 1980 and 2000. Currently, a period of turning to a new trend is observed – the transportation index will be growing faster than the CPI. This turn is accompanied by very high volatility.

Figure 12. Same as in Figure 11 for the period after 2002. The transportation index likely started to grow faster than the CPI. New linear trend has not finally developed and more volatility might be expected in the housing expenditure category. “


Instead of the difference between the (seasonally adjusted) headline CPI and the index for transportation we inspect the deviation of the transportation index from the core CPI. In 2008, after a short period of increase induced by the spike in oil price, the index for transportation has been decreasing at a very high rate relative to the core CPI, as shown in Figure 1. This was a dramatic drop in the index from 2007 in July to 167 in December. Apparently, it was also caused by the fall in oil price from $149 to $38. Goods and services related to transportation easily lost their pricing power. So, one can assume that that index was driven by an external force.
Since January 2009, the prices index for transportation has been oscillating around the level 170 despite crude oil price almost doubled. Such behavior is difficult to explain but it seems that transportation loses its bounds to oil price. So, it is likely (e.g. this is our working hypothesis) that the difference will eventually return to the old trend, as shown in Figure 2. This process should be accompanied by an intensive growth in the index itself. It should jump in the near future to the level around 200. In the long-run, the difference will reach its turning point somewhere between 2015 and 2020, if our assumption on the presence of long-term sustainable trends is applicable to the index of transportation. If the transportation index returns to the trend, it will be the best validation of our approach.

Figure 1. The difference between core CPI and the index for transportation between 1960 and 2009.

Figure 2. 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 preliminary conclusions about the past and the future of the index of transportation can be derived from Figure 2.
The consumer price index for transportation is sensitive to the changes in the index for energy and crude oil price, but likely the bounds loosen with time.
Since 2008, the index for transportation has been characterized by very high volatility, which currently makes any further prediction unreliable.
The difference between the core CPI and the index for transportation will be likely decreasing in absolute terms by the end of 2009 with a possible stretch into 2010.
The index of transportation itself should increase by ~30 units in the near future.
The difference should return to the long-term trend with the next turning point between 2015 and 2020.

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.