Following our previous post on the difference between the headline CPI and GDP deflator we have to revisit the difference between the overall CPI and core CPI (the headline CPI less food and energy). This difference also demonstrates severe changes in definitions of all involved variables and reveals a break in these time series, which harms the compatibility of CPI measurements before and after 1979.
Two years ago we published a paper on the presence of long-term sustainable trends in the differences between various components of the CPI in the USA. We started with the difference between the core CPI (i.e. CPI less food and energy) and the overall CPI. Figure 1 is similar to Figures 1 and 2 in the paper.
Figure 1. Linear regression of the difference between the core CPI and CPI for the period from 1981 to 1999 (R2= 0.96 the slope is 0.67) and linear regression of the difference between the core CPI and CPI between 2002 and 2009 (R2=0.91, and the slope is -1.59).
We also suggested in this and later papers on the sustainable trends in the CPI and PPI (see here) that the negative trend after 2002 should reach some bottom point and turn to a positive trend. It was also mentioned that such processes in the past had been accompanied by an elevated volatility in the difference, i.e. high amplitude fluctuations. All predictions were actually observed. Figure 2 updates Figure 1 with data available in November 2010.
Figure 2. A new positive trend has been emerging since 2010.
Therefore, we confirm our previous predictions and expect the new positive trend in Figure 2 shows. This trend repeats the trend observed between 1987 and 1999 rather than the mirror reflection of the previous negative trend between 2002 and 2009, as was suggested before. 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. We will keep posting on the difference