On December 21, 2010 we revisited the evolution of the price index of motor fuel (a component of the transportation consumer price index). It is time to test our predictions and make new projections.
Here we follow our concept of deterministic and sustainable trends in the differences of consumer price indices. The model implies that the difference between the headline (or core) CPI and a given individual price index, iCPI, can be described by a linear time function over time intervals of several years:
CPI(t) – iCPI(t) = A + Bt (1)
where A and B are empirically estimated coefficients, and t is the elapsed time. Therefore, the “distance” between the CPI and the studied index is a linear function of time, with a positive or negative slope B. Free term A compensates the difference related to the start levels for a given year.
On December 21, 2010 we presented Figure 1 and suggested that the difference reached some new trend and would follow it in the future. However, the evolution since January 2011 has been following another trajectory which resembles the fluctuation in 2008. We have already mentioned in this blog that the volatility in commodity prices has been extraordinary since 2005. This might be associated with speculative capital and/or quant funds. In any case, the swing in 2011 has come to its peak, as we expected a month ago, and not is returning to the trend. We expect the price index of motor fuel to grow at a lower rate than the headline CPI in order the difference to reach the trend by the end of 2011. In physical terms, the motor fuel price will likely be falling together with crude oil.
Figure 1. The difference between the headline CPI and the index for motor fuel. Solid diamonds represent the prediction given in March 2009 through December 2009. The total increase in the difference is +60 units of index or +35%: from 173 in March to 233 in December 2010. Dashed line represents the new trend, which is a mirror reflection to that between 2001 and 2008 shown by solid black line. In 2010, the difference has been fluctuating around the trend and thus should return to the trend in the beginning of 2011.
Figure 2. Same as in Figure 1with data through June 2011.