Krugman's misinterpretation of long-term inflation

Paul Krugman has shown the evolution of headline CPI (level) since 2000 in order to demonstrate that the current trend manifests upcoming inflation. His conclusion is likely wrong due to couple mistakes in the presentation and interpretation.
  1. He narrowed the period to ten years and thus implied that the headline CPI trend was the same before 2000 and will be extended into the 2010s. Both assumptions are not true.
Figure 1 definitely shows that the trend before 2000 was different from the current one. Between 1980 and 1998, the headline CPI grew at a lower rate than the core CPI and they diverged. In 2000, the indices started to converge and the CPI curve intercepted the core CPI one in 2009. Very likely that the future trend will repeat that observed between 1980 and 2000, not continue the trend observed in the 2000s.
Therefore, the core CPI will be growing at a higher rate again and the headline CPI will sink below the core CPI level. Then the CPI inflation rate will be smaller than that defined by the core CPI. 

Figure 1.  Upper panel: The headline and core CPI levels between 1980 and 2011. Lower panel: the difference between the core and headline CPI demonstrates linear trends. One may expect the next trend to be positive and the headline inflation rate will be lower that the core inflation rate.  Krugman's assumption on the long-term trend in the headline CPI was not correct.

  1. The core inflation rate has been on decline since 2007, as Figure 2 shows. Despite very high volatility, the headline CPI always returned to the core CPI level. Our inflation model [1] shows that the current trend in the core CPI will be retained in the next decade below the zero line. Hence, the overall inflation rate will be also negative. An extended deflationary period will be observed.

Figure 2. The rate of price inflation as defined by the headline and core CPI.

  1. Kitov, I. (2006). Exact prediction of inflation in the USA, MPRA Paper 2735, University Library of Munich, Germany

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