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6/16/09

PPI vs. core PPI

There are sustainable trends in the difference between various components of PPI [1].
Figure 1 demonstrates the presence of quasi-linear trends in the difference between the overall PPI and the core PPI, i.e. the PPI less food and energy. Both indices are seasonally adjusted ones and represent finished goods (http://www.bls.gov/data/).

Since 2008, the trend, which was reigning between 2001 and 2008, started to fade away and a new trend have been emerging. This period is characterized by very high volatility. A downward spike in the difference, as observed in 2008, was followed by a positive spike in 2009. Currently, the difference intersected the zero line.
The presence of sustainable trends allows predicting the future evolution of the difference, if it follows up the same rules. The new trend is not defined yet. But following the logic of the previous turns in the trends, we can assume that the new trend will be a positive one. A naive assumption is that it will be of the same slope but with an opposite sign, as shown in Figure 2.
This trend defines the long-term behavior of the difference. In the short-run, all current deviations from the trends should be compensated by opposite deviations in the near future. Therefore, we predicted in our paper that the current positive deviation from the new trends must be compensated soon. It means that the difference should decrease and intersect the new trend line. The readings of the PPI and core PPI for March, April, and May indicate a move towards the trend. During the summer months, the core PPI should grow much slower than the overall PPI, what is consistent with our prediction of rapid increase in crude petroleum price.
Figure 1. The difference between the core PPI and the overall PPI between 1974 and 2009. There are two distinct period of quasi-linear trends: 1980-2000, and 2001-2008.

Figure 2. A new trend has been emerging since July 2008. Green line - a naive assumption on the new trend - same slope but with an opposite sign.

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