6/12/09

Linear trends in consumer price index for "restaurants"

A WSJ blog “Real Time Economics” has mentioned that “Restaurant Prices to Flow Into ‘Core’ Inflation Measure” . It is interesting to evaluate the behavior of the index for “full service meals and drinks” relative to the core CPI. Following our standard approach [1, 2] 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 [2], 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.
Since July 2008, we have been observing a turn to a negative trend [1,2]. Our naive assumption about this new trend is that it will repeat the previous one but with an opposite sign. 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 CPI, which will include the index for restaurants, will be growing at a slightly higher rate since July 2009.

References
[1] Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, vol. 3(2(4)_Summ), pp. 101-112, Spiru Haret University, Faculty of Financial Management and Accounting Craiova.
[2] Kitov, I., (2009). Apples and oranges: relative growth rate of consumer price indices, MPRA Paper 13587, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/13587/01/MPRA_paper_13587.pdf

Figure 1. The difference between the core CPI and the price index for “full service meals and drinks”. Green line represents the expected trend between 2009 and 2018.