1/7/11

Did we predict the new linear trend in the price index for "restaurants"?

A year ago, in response to the WSJ “Real Time Economics” post “Restaurant Prices to Flow Into ‘Core’ Inflation Measure” we evaluated the behavior of the price index for “full service meals and drinks” relative to the core CPI. Following our standard approach to small components of the CPI [1, 2], we calculated the difference between the core CPI and the index for “full service ..”. Figure 1 displays the difference as of June 2009.
As with many other components of the headline CPI [2], this difference is characterized by 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, a negative trend has been observed. Our naive assumption about this new trend was that it would repeat the previous one but with an opposite sign. Green line in Figure 1 represented the expected trend.


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.

In 2011, we revisit this prediction and plot new data in Figure 2. As expected, the difference has reached the new trend line and slightly overshot it. In 2011, one cannot exclude the difference to decline below the new trend. Thus, the index of “restaurants” will be growing faster that the core CPI.


Figure 2. The difference has reached the new trend and slightly overshot the line. In 2010, one can expect the index of “restaurants” to grow faster than the core CPI.

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

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