Three months ago we reported that the price index of housing had been decreasing since the end of 2008 relative to the overall CPI. This is a sustainable negative trend in a CPI subcategory with the highest input in the overall CPI. The housing index comprises approximately a half of the headline CPI.
Figure 1 displays the difference between the CPI and the housing index (both not seasonally adjusted) as reported by the BLS on April 14, 2011. The current trend is positive (the CPI grows faster than the index of housing) and the difference has been growing at a rate of +0.4 per month. Between 1996 and 2007, the slope was -0.06 per month.
… Turning now to the outlook for U.S. consumer prices, I anticipate that the recent surge in commodity prices will cause headline inflation to remain elevated over the next few months. However, I expect that consumer inflation will subsequently revert to an underlying trend that remains subdued, so long as increases in commodity prices moderate and longer run inflation expectations remain reasonably well-anchored …
This statement does not contradict the long term trend in Figure 1. In several months, the current surge in energy prices will die and they likely return to the level of 2010. Then one will see a very low price inflation rate for 2011, as we predicted in 2005.
The decrease in the housing index (relative to the CPI) will be accompanied by an effective stop in the food price growth and the fall in the transportation index relative to the CPI. All these effects will bring an extended period of deflation into the U.S. economy in 2012.
Figure 1. The change in the trend started in 2009. The current trend is positive (the CPI grows faster than the index of housing) and the difference has been growing at a rate of +0.4 per month. Between 1996 and 2007, the slope is -0.06 per month.
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