This is an annual update. We continue reporting on and predicting the evolution of the difference between core CPI and the index for food (beverages not included). Previously, we confirmed in many posts and papers that this difference had been following a long-term (negative) quasi-linear trend since 2001. There is an important change expected in 2012 – the predicted turn to a positive trend. In other words, the price index of food will grow at a pace lower than CPI.
In 2008, the trend line was much steeper than predicted and crossed the zero line. In the beginning of 2009, the trend reached the bottom and turned to a positive one, although not for long. The growth in food prices restarted in 2010. In the end of 2011, the difference has a short stop which might be a manifestation of the transition to a positive trend as Figure 1 depicts.
In June 2011 we found that the trend (black) line crosses the zero line in the end of 2010. Therefore, Figure 1 also demonstrates that the difference between the core CPI and the index of food has been slowly approaching to its original trend (red line) since 2009.
Here we conclude that the intercept with the zero line and the pivot to the decreasing food price will start in 2012 when the difference will reach some bottom (resistance) level (currently -5). Considering the higher probability of deflation in 2012, food price will stop to rise in 2012.
However, the previous negative/positive turn was at the level of -10, as displayed in Figure 2, one cannot exclude that the negative trend may change only after 2016. This case is less likely, however.
Figure 2. The difference between the core CPI and the price index of food between 1960 and December 2011.