CPI and core CPI. Quarterly update

The U.S. Bureau of Labor Statistics has reported the estimates of various consumer price indices for June 2011. According to our quarterly schedule, we have to revisit the difference between the headline and core CPI in July 2011. As expected, these new estimates reveal a crucial turn in the difference. After 10 consecutive months of fall, the difference started to grow.  This turn manifests the beginning of a new period leading to price deflation in 2012. We expect the rate of consumer price inflation to fall below zero somewhere in 2012.  

Figures 1 and 2 briefly repeat our concept of sustainable (quasi-linear) long-term trends in the difference between the headline and core CPI in the U.S. There were two clear periods of linear behaviour: between 1981 and 1999 and between 2002 and 2009. A natural assumption of the future evolution of the difference was that a new trend has to emerge around 2010 after a short period of very high volatility. (However, the difference is very volatile also in 2011.  There is no sign that the higher volatility will calm down any time soon.)

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 a regression of the difference between the core CPI and CPI between 2002 and 2009 (R²=0.91 and the slope is -1.59). 

Accordingly, Figure 2 illustrates this hypothesis with the reversion (like mirror reflection) of the trend between 2002 and 2009. We expected this new trend with a positive slope to be developed between 2008 and 2011, as shown by the solid red line. Against our early expectations, after a year of “right” evolution in 2010 the difference fell to the zero line again in 2011. After a slight growth in May 2011, which we discussed a month ago, the difference made a large step up in June 2011. Hence, May 2011 was a pivot point for the difference and it will likely be approaching the trend through the end of 2011.

Figure 2. The evolution of the difference between the core and headline CPI since 2002.

Figure 3 depicts the most recent period with the turn in May 2011. It is not excluded that the difference will return to the long-term trend by the end of 2011. This return should be accompanied by a remarkable drop in the index price of energy which was the driver of the headline CPI in the first quarter of 2011.  As a result, oil price will be falling in 2011 and food price will likely grow at a very low pace if grow at all. We are preparing some updates for the difference between the price index of energy and the core CPI.

Figure 3. The evolution of the difference between the core and headline CPI since 2010.